Can co-founders of a seed-funded startup take away equity of another co-founder without buyback?

Question

In this scenario, a co-founder is quitting the company after giving 4 years of his life to the startup. Is it possible for the other co-founders to make his equity worthless and take it away without a buyback? What should be the ideal solution here?

Paul Korver · Accepted Answer

This is a question for a corporate attorney.  Depends on how your startup was structured. Is there a corporate Stock Plan?  Was there a Stock Purchase Agreement (SPA)?  Was there a vesting schedule in the SPA?  Does it define leaving "with cause"/"without cause"? Is there a Stock Power exhibit to the SPA?  Were these docs all signed?

Provided nothing illegal / unethical was done the ideal solution is that the co-founder should be able to leave, and his/her stock be repurchased by the startup based based on a 409a valuation provided at time of departure.

Rajat Dangi 🛠️ · Answer

@paulkorver Shares were vested on a monthly basis. In case of departure, the unvested shares would be a buyback. In this particular case, there's a good amount of vested shares.

So, is it possible for other Co-founders to make the vested equity worthless, take it away, without compensating for it?

Answer

I'm not sure how to make a suggestion when I do not know under which condition the co-founder leaves the company.

Can co-founders of a seed-funded startup take away equity of another co-founder without buyback?

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