The scenario. Two co-founders form a Delaware C-corp and split equity 50/50. Eight months later, one of them — the “technical co-founder” — has not written a meaningful line of code in six weeks, is taking calls about other opportunities, and announces he is leaving. The remaining founder has been carrying the work for months and is about to fundraise. What happens to the departing co-founder’s 50%?
Version A: No vesting
If both founders issued themselves unrestricted common stock at incorporation, the departing co-founder walks out the door with 50% of the company. The remaining founder spends two years building value into a cap table that is permanently half-owned by someone who is no longer involved. Investors will see this and either refuse to invest, demand the departed founder sign over the shares (he may not), or restructure on terms that punish the remaining founder.
This is one of the most common preventable founder catastrophes. We have seen multiple companies abandoned because the remaining founder concluded it was easier to start over than to dilute through a co-founder who would not engage.
Version B: Vesting + repurchase right
Both founders signed Restricted Stock Purchase Agreements at issuance, with four-year vesting, a one-year cliff, and the company’s right to repurchase unvested shares at the original purchase price (typically a fraction of a cent per share). At month eight, the departing co-founder is still inside the one-year cliff — meaning ZERO of his shares have vested.
The company exercises its repurchase right. The board (now the remaining founder) approves the repurchase by written consent. Because the founder pre-signed a Stock Power and an Assignment Separate from Certificate at issuance — both held in escrow by the company’s counsel — the share certificates can be cancelled mechanically without needing the departed founder’s cooperation.
How much that saves
50% of a future $10 million exit is $5 million. 50% of a future $100 million exit is $50 million. The cost of the restricted-stock setup, including the legal work, is a few hours of attorney time at incorporation. The ROI on this particular bit of legal foundation is among the highest of any document in startup law.
What about the IP?
The departing co-founder also signed a Founder IP Contribution and Assignment Agreement at incorporation. Any code, schematics, or designs he contributed to the company before his departure are unambiguously the company’s — not his personal property to take with him.
The fork beyond the cliff
If the departure had happened at month 14 instead of month 8, the one-year cliff would have vested — 25% of his shares (12.5% of the company) would be fully vested and unrepurchasable. The remaining 75% would still be subject to repurchase, leaving the remaining founder with about 87.5% of the company. Still excellent. The math always favors the remaining founder if vesting was in place.
What to do if you forgot
Companies sometimes form without vesting, then realize the gap before any co-founder has left. The fix is to retroactively apply vesting through an Amended and Restated Restricted Stock Purchase Agreement. This requires both founders’ consent and triggers an 83(b) election at the time of amendment, but it is far better than no vesting. If you are reading this and your cap table has unrestricted founder stock, fix it this week.
Talk to a Florida Business Lawyer
If you are navigating a scenario like this one, schedule a consultation with Montague Law at 904-234-5653 or use the contact form. The firm represents founders, investors, and business owners statewide and nationally from offices in Fernandina Beach and Coral Gables (Miami).
Templates and resources referenced
- Restricted Stock Purchase Agreement
- Stock Power (Irrevocable)
- Assignment Separate from Certificate
- Founder IP Contribution and Assignment
This case study is a composite illustration drawn from common founder scenarios. It does not describe any specific client or matter and is provided for general informational purposes only. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Consult counsel for guidance tailored to your specific facts.
