A co-founder leaving doesn’t mean something has gone wrong. It’s often a normal part of building a high-stakes startup. Around 25% of venture-backed startups in the UK see a founder step away within the first four years. This blog covers what to expect, how to prepare, and how to manage the process when a co-founder decides to leave, whether it’s a smooth transition or a more difficult exit.
1. Spotting the Signs Early
Most co-founder exits start with disagreements about direction. If things feel off, do not ignore it. Conversations early on are easier and less costly than dealing with a major fallout later.
Clashing visions often show up in small ways. One founder wants to perfect the product while another wants to grow revenue quickly.
If tensions are building, it’s also worth thinking through the practical implications of a possible exit: how would the team take over product ownership or key customer relationships if a founder stepped away? Identifying potential “business critical points” early and building a contingency plan around them gives the business a better chance of continuity if discussions don’t go as hoped.
2. Revisit the Basics
When tensions rise, step back and revisit the original mission. What roles did you agree on?
Each founder brings something different. Some are academic or research focused, while others are more commercial. If you do not have a Shareholders’ Agreement, now is the time to create one. It is much easier to set expectations while you are still aligned.
A good Shareholders’ Agreement defines roles, decision making rights, equity, and what happens if there is a dispute or someone exits. If you already have one, read it again.
3. Find a Way Forward or Apart
Not every issue can be solved in a boardroom. The founding team should meet in a neutral setting, away from daily pressures, to focus on the partnership itself.
These talks are not about blame. They are about being honest and deciding how to move forward, either together or separately. If you cannot make progress, bring in a neutral third party.
If parting ways, it is important to consider who leaves and who stays. Sometimes, the situation is straightforward. For example, when one of four co-founders steps away while the others continue.
When the founding team is smaller, more balanced or the situation more complex, other factors come into play. Ultimately, the founder who has been most instrumental in driving the business forward, through IP development, commercial traction, product delivery, or leadership, should usually remain. The founder who is no longer contributing meaningfully or who simply wants to pursue something else is usually the one to exit.
In some cases, a founder may leave in search of greater stability or for personal reasons.
4. A Clean and Civil Exit
A respectful exit is always better. No drama, no blame, no surprises.
The Shareholders Agreement and Articles of Association may include “leaver” provisions, setting out what happens if a founder exits. For example, if a departing founder is a good leaver, they may keep their vested shares. Unvested shares usually return to the company or are reclassified. This is all subject to the terms of the legal documents, and you should take legal advice.
Even with leaver provisions in place, it is smart to negotiate terms that will not affect future fundraising. If the exiting founder holds less than 5 percent of share capital, that is usually manageable. Anything more may need to be restructured.
You can also agree to move the shares into a different class with limited rights or upside.
And remember, it is better for an exiting co-founder to own a small part of a thriving company than a large part of one that is hindered by its cap table. The company must remain attractive to new investors, and the remaining founders must be properly incentivised.
5. Dealing with a Hostile Exit
Hostile exits are difficult. They are slow, expensive, and emotionally draining.
Start by reviewing your legal documents. A bad leaver clause might allow the company to buy back or reclassify shares on resignation.. But enforcing these clauses can be challenging under employment or company law, and be time-consuming, so it may be more desirable to agree terms with an exiting founder even if emotions are running high.
Common issues include
- Refusing to resign as a director
- Disputes over share value or status
- Legal action or mediation requests
Best practices
- Document everything
- Get legal advice early
- Stay professional
Importantly, do not try to soldier through it alone. Many founders wait too long to seek legal advice, only to find they’ve already said or done things that undermine their position. Just because you’re speaking to a lawyer doesn’t mean you are committed to a formal legal process, or must correspond through lawyers; in fact, it’s often better not to. You should, however, be getting that advice discreetly in the background before you engage in any substantive exit discussions. Early legal input will give you a clearer strategy, a stronger negotiating position and far fewer surprises down the line.
The best way to deal with a hostile exit is to prevent one. Set clear expectations early, have regular check ins, and update agreements as the company evolves.
Final Thoughts
Co-founder exits are part of the startup journey. They usually mean something important is at stake, such as vision, trust, or direction.
If you address the issue with honesty and structure, it can bring clarity and growth. Ignoring it only makes things worse.
Be upfront with investors.
Your Shareholders Agreement and Articles of Association are there to protect the business, not punish anyone. Use them.
This blog is brought to you by SFC Capital in partnership with Simons Muirhead Burton LLP, whose experienced London-based legal team are here to guide founders through the intricacies of the entrepreneurial landscape. The team at SMB understand that building a business from the ground up is both thrilling and challenging, which is why they offer comprehensive legal advice tailored specifically to meet the needs of founders throughout their entrepreneurial journey.
Get in touch with Natalie.Wright@smb.london, Neal.Hodges@smb.london, Raoul.Lumb@smb.london and robert.hepburn@smb.london for more details.
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