3.12Co-founders and the founding team

Co-founder breakups: buybacks and good/bad leaver terms

Stage: Pre-seedCore

1. Core idea and who it's for#

When a co-founder leaves, three questions decide whether the company survives cleanly:

  1. How many shares do they keep? Vesting answers this: unvested shares come back, vested shares are theirs, subject to the leaver terms.
  2. At what price are shares bought back? Leaver terms answer this. A "good leaver" usually keeps vested shares or sells them at fair value. A "bad leaver" may have to sell even vested shares at nominal value or cost.
  3. Who buys them, and how? The company, the other founders, the option pool or a trust. Each route has company-law rules and tax effects.

If these questions are answered in your documents before anyone leaves, a breakup is mostly administration. If they are not, it becomes a negotiation with someone who now has every reason to drive a hard bargain, and who may hold a large block of shares in a company they no longer work for. Investors call that "dead equity", and it can make the company hard to fund.

Who it's for: founders setting up vesting and leaver terms (with 3.06 and 3.07), and founders handling an actual departure now.

The one-line rule: agree the leaver terms while everyone is still friends, keep the definition of "bad leaver" narrow, and when someone leaves, follow the documents, not your feelings.

2. Evidence#

Unvested shares come back in almost every case. Ashfords notes that unvested shares are usually forfeited on departure, whether the leaver is good or bad. Osborne Clarke says the same: unvested shares are treated as worthless whatever the reason for leaving.

The fight is over vested shares, and over who counts as "bad". Typical drafting has the company buy a bad leaver's vested shares at nominal value, and a good leaver's at fair value or not at all. Some agreements add an intermediate leaver who keeps vested shares but sells unvested shares at cost.

UK market practice has moved towards founders. The BVCA model documents, revised in 2025, no longer treat resignation as an automatic bad-leaver event. In the BVCA construct, a good leaver is anyone who is not a bad leaver. A good leaver keeps their vested shares, and the unvested part converts into worthless deferred shares. Orrick notes that UK practice increasingly defines a good leaver as anyone who leaves other than for cause or to join a competitor, following the US.

US practice is simpler. Vested founder stock is usually kept outright, whatever the reason for leaving. The company has a right to repurchase unvested stock at the lower of cost or fair value. "Bad leaver" forfeiture of vested stock is uncommon in US venture deals (3.06).

India sits in between. Indian law has no statutory concept of unvested shares, so vesting is done through reverse-vesting terms in the shareholders' agreement and articles. Treelife notes that where there is no leaver clause, companies usually negotiate a buyback at fair value backed by a registered valuer's report, which is slower and more expensive.

Departures are common enough to plan for. More than a quarter of two-founder teams lose a co-founder by year four, according to Carta data (see 1.18). Unclear leaver terms are a known source of litigation, and Jonathan Lea calls ambiguity here a frequent cause of disputes.

3. Method#

Part A: set the terms before anyone leaves#

1. Define "bad leaver" narrowly and exactly. A fair founder-friendly definition covers only:

  • dismissal for gross misconduct or fraud;
  • a material breach of the IP assignment, confidentiality or non-compete terms that isn't fixed after notice;
  • leaving to join or set up a competitor within an agreed period.

Everyone else is a good leaver. If investors insist that resigning in the first 12 to 24 months makes someone a bad leaver, limit that to unvested shares, or to a short period.

2. Set the price for each case.

Unvested shares Vested shares
Good Back to the company at nominal Kept (most common), or bought back at
leaver value or cost fair value at the company's option
Unvested shares Vested shares
Bad leaver Back at nominal value or cost Bought back at the lower of cost and fair
value, or at nominal value. Some deals
limit this to the most serious cases.

3. Decide who decides. Normally the board decides leaver status, acting reasonably. If the leaver sits on the board, they shouldn't vote on it. Add a right to challenge through an expert or arbitration on fair value.

4. Plan for the shares the leaver keeps. Consider a voting proxy or agreement so the leaver's vested shares follow the board or majority. Make sure drag-along applies to them, and put information rights only where the law requires.

Part B: when someone leaves#

  1. Confirm the facts and the documents. Find the leaving date, check which vesting and leaver terms apply, and note any acceleration or notice terms.

  2. Talk before you paper it. Agree the story, the timing and the handover. Most departures are good-leaver cases, so treat them that way.

  3. Calculate the numbers. Work out vested and unvested shares at the leaving date, the buyback price and who pays.

  4. Sign a separation agreement. It should cover:

    • the share position and the buyback;
    • confirmation that all IP has been assigned, with a handover of lab notebooks, code and data;
    • resignation as a director;
    • a mutual release and agreed messaging;
    • any consultancy for the handover;
    • confidentiality and any non-solicit.

  5. Do the filings. Update the register and cap table, and make the company-law and tax filings (section 4). Tell investors before the team hears it elsewhere.

  6. Recycle the equity. Returned unvested shares usually go back to the pool to hire a replacement.

Worked example (illustrative)#

Two founders started a robotics company with a 50/50 split, 4-year vesting and a 1-year cliff. After a seed round, each holds 40% of fully diluted shares, investors hold 20%, and the pool is empty until a top-up.

At month 22, founder B, the CTO, decides to leave for personal reasons. This isn't misconduct and isn't to join a competitor, so B is a good leaver.

  • Vested: 22/48 of 40% is about 18.3% of fully diluted shares. B keeps these.
  • Unvested: about 21.7% is bought back at nominal value, which is a few hundred pounds or dollars. It goes into a new pool to hire a CTO.

Extras agreed:

  • B signs a voting agreement to vote with the board on drag-along and future rounds.
  • B confirms the IP assignment and hands over the code and data.
  • B consults for 3 months at a day rate to support the handover.

The remaining founder still holds 40%, the largest active stake, and the new pool funds a replacement. Investors see 18.3% held by a supportive former founder rather than a 40% block of dead equity. They are comfortable continuing to fund the company.

4. India, US and UK differences#

India#

  • How vesting works: Indian law has no unvested shares, so reverse vesting in the shareholders' agreement and articles obliges the leaver to transfer shares when they leave. The shares can go to the other founders, a nominee, or an ESOP trust.
  • Company buyback: a buyback under section 68 of the Companies Act 2013 needs free reserves or a securities premium. It is limited to 25% of paid-up capital and free reserves (10% with board approval only), with a 12-month gap between buybacks. Most early startups cannot meet these tests, so a transfer to other shareholders is the usual route.
  • Tax on transfers below fair value: a transfer at nominal value when the shares are worth more can tax both sides. The seller is deemed to have sold at fair value, and the buyer is taxed on the discount, with the old sections 50CA and 56(2)(x) carried into the Income-tax Act 2025. Get a valuer's report and take advice before agreeing a nominal price. Sometimes a transfer at fair value, with the proceeds netted off, is cheaper overall.
  • Buyback tax: since 1 October 2024, the money a shareholder receives in a company buyback is taxed as a dividend, with the cost of the shares treated as a capital loss. Paperwork: share transfer forms (SH-4) and stamp duty, an updated register, and any filings for a buyback.

US#

  • Repurchase right: the stock purchase agreement gives the company the right to buy back unvested stock, usually at the lower of cost and fair value, within a set period (often 90 days). Vested stock is normally kept.
  • 83(b) and tax: if the founder filed an 83(b) election, the buyback of unvested shares at cost has little tax effect. If they didn't, vesting events may already have created taxable income.
  • Company law: Delaware companies can only repurchase shares out of surplus (section 160 DGCL). This is rarely a problem for repurchases at cost, but matters for buybacks at fair value. Board approval and an updated stock ledger are needed.
  • Options: if the founder held options rather than stock, unvested options lapse and vested options usually have a 90-day exercise window. Extending it changes ISO status.

UK#

  • Mechanics: the BVCA model articles usually convert unvested (and bad-leaver) shares into deferred shares with no economic rights. This avoids the need for the company to find cash or meet buyback rules. Otherwise, the company can buy back shares under the Companies Act 2006, out of distributable profits or using the private company exceptions, or the leaver can be required to transfer to other shareholders or an employee benefit trust.
  • Tax: a transfer at nominal value can have income tax consequences if the leaver is or was an employee. A buyback by the company can be taxed as a distribution unless the capital treatment conditions are met.
  • SEIS and EIS: check that the buyback doesn't break SEIS or EIS relief for investors. Returning value to shareholders within 3 years can be a problem.
  • Good leaver definitions: the 2025 BVCA documents are a useful benchmark when negotiating.

Scripts#

Agreeing leaver terms at the start:

"Neither of us expects to leave, which is exactly why we should agree this now. I'd suggest that if either of us leaves for any reason other than misconduct or joining a competitor, we keep our vested shares and return the rest. Does that feel fair to you?"

Opening the departure conversation:

"I want this to be fair and to protect what we've both built. Our agreement says you keep your vested shares, about 18%, and the rest comes back to the pool. Let's agree a handover plan and how we tell the team and investors."

Asking for a voting agreement:

"You'll still be a big shareholder, and that's earned. Investors will want to know your shares won't block the next round or a sale. Would you sign a voting agreement that follows the board on those points?"

To investors:

"B is leaving as a good leaver on 31 January. B keeps 18.3% vested, 21.7% returns to the pool, and we're hiring a CTO with it. B has confirmed the IP assignment and will consult for three months."

Common mistakes#

  1. No leaver terms at all. This is the most expensive mistake. Without terms, you have to negotiate a buyout from scratch.
  2. A vague "bad leaver" definition. Words like "poor performance" invite disputes, and courts may read them narrowly.
  3. Treating resignation as bad. This is now out of line with UK market practice and can feel punitive. It also encourages founders to stay disengaged rather than leave.
  4. Nominal-value transfers without tax advice in India. Both sides can face a tax bill on the difference from fair value.
  5. Forgetting the IP. A departing technical founder must confirm assignment and hand over notebooks, code and data. Check for any inventions made outside the company.
  6. Letting the leaver stay on the board. Agree a resignation date as a director in the separation agreement.
  7. Leaving the unvested shares idle. Recycle them into the pool for a replacement.
  8. Telling the team before the documents are signed. Agree the story first, and announce once the terms are settled.
  • 3.05 Splitting founder equity
  • 3.06 Founder vesting, cliffs and acceleration
  • 3.07 Founder agreements: roles, decisions, deadlocks
  • 3.09 Adding a co-founder late or after a round
  • 3.11 Resolving co-founder conflict
  • 3.17 Replacing yourself as CEO
  • 5.01 ESOP pool sizing

Sources#

This playbook is general information, not legal or tax advice. Leaver terms, buyback rules and tax treatment depend on your documents and country, so get advice before agreeing or enforcing a buyback. Last checked November 2026.

← 3.11 Resolving co-founder conflict3.13 Paying founders before and after funding →