What to do with shares when your co-founder has left

A co-founder’s departure isn’t easy. There’s the emotional side of it…and on top of that there’s the admin. Co-founder fallouts or mutual way-partings are common, so we’re often asked Now what do we do with their shares after they leave? Here’s your answer from startup expert and SeedLegals co-founder Anthony Rose. 

🎬Watch: What to do with shares when your co-founder has left

Decide who gains equity
When a co-founder departs, the first step is determining how their equity will be redistributed. Should the remaining co-founder(s) take on the shares, should they be redistributed among all shareholders? The choice depends on the company’s stage and its shareholder structure.

Understand investor expectations
Investors may have specific views on how equity is managed post-departure. Early on, you might negotiate to retain the shares within the founder group. However, at later stages (e.g., Series A), investors typically expect shares to be canceled and redistributed equitably, rather than benefiting one party disproportionately.

Use deferred shares 
Converting the departing co-founder’s equity into deferred shares is a common solution and easy way of cancelling shares. Deferred shares hold no voting rights or value, effectively nullifying them without tax complications or share transfer complexities. This keeps your cap table clean and compliant.

Avoid tax pitfalls
Transferring shares directly to other shareholders or co-founders can create unexpected tax liabilities. You can use mechanisms like deferred shares or growth shares to minimise financial and legal risks for all parties.

Reassess your share option pool
After resolving the equity split, consider increasing the size of your share option pool. This adjustment accommodates potential new hires, late-joining co-founders, or senior employees without causing further dilution for existing shareholders.

Plan for the long-term
Your approach to handling departing co-founder shares should align with your long-term growth plans. Clear communication with investors and a solid strategy for equity redistribution are essential for maintaining trust and stability.

Talk to an expert

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