In this article
Few corporate events are as financially and emotionally loaded as a co-founder buyout. Two people who built something together must now put an exact dollar figure on one person's share of that thing — and then agree on who pays it, when, and how. The process sits at the crossroads of corporate law, business valuation, tax planning, and interpersonal negotiation. Done well, it closes cleanly, clears the cap table, and lets both parties move forward. Done poorly, it drags through litigation, derails fundraises, and leaves both sides worse off than if they had simply walked away.
This article walks through the full mechanics: how the price is set, which valuation methods apply at different stages, how payment is structured across lump sums, installments, seller notes, and earnouts, who facilitates the closing, and where the friction tends to accumulate. It is written for the attorneys, accountants, brokers, and settlement agents who handle these transactions, and for the founders who need to understand the terrain before they sit down at the table.
The first two figures are the article's worked examples, Scenario A and Scenario B; the third is the typical range for seller promissory notes.
Why co-founder buyouts happen — and why they are different from ordinary acquisitions
A partner buyout occurs when one or more parties purchase another's ownership interest in the business. These transactions may occur due to retirement, strategic changes, conflict, or unforeseen circumstances. In the startup world, the precipitating event is almost always one of three things: a divergence in strategic vision, a performance imbalance where one founder has become a passenger, or a personal life event that makes continuation impractical.
What makes co-founder buyouts structurally different from ordinary third-party acquisitions is the bilateral pressure on price. Unlike third-party sales where market forces determine prices, partner buyouts require methodical valuation approaches balancing departing partners' desires for maximum value against continuing partners' needs for affordable transitions that don't cripple business operations or personal finances.
The surviving founder or founders cannot afford to overpay — they are buying an interest in a company they already run, and cash deployed on a buyout is cash not deployed on product, headcount, or runway. But if the departing founder accepts a price that later looks dramatically low — particularly if the company is acquired two years later — the relationship sours, legal challenges can follow, and reputations in a tight founder community suffer.
There is also the cap table question. A common early equity mistake is issuing founder shares at incorporation with no vesting schedule, which can mean a departing co-founder keeps their full stake regardless of contribution, and institutional investors often flag this as a dealbreaker. The presence or absence of a vesting schedule changes everything about what is being bought.
The vesting layer: what is actually for sale
Before any valuation discussion begins, the parties need to determine what shares are actually on the table. This is where the founding documents either make the conversation simple or make it brutal.
A four-year vesting schedule with a one-year cliff is the market standard for both founders and early employees: after the one-year cliff, 25 percent of your shares vest at once, and the remaining 75 percent vests monthly over the following three years. If the departing co-founder leaves before the cliff, the calculus is stark.
The standard schedule — the one Y Combinator has recommended to nearly every batch — is four years with a one year cliff: nothing vests until the founder has been with the company for twelve months, then 25% vests at once, and the rest vests monthly over the following three years. If a co-founder leaves at month eleven, they vested zero shares. All 40% of their original grant is still legally issued to them on paper, but it's unvested, and the company's repurchase right lets it buy every share back, usually at whatever the founder originally paid for it.
That repurchase right is critical. The company can buy back unvested shares at the original purchase price, typically nominal, effectively removing the departing founder's unvested equity from the cap table.
What complicates things is the vested portion. Good-leaver and bad-leaver terms matter here: founders who leave amicably or are terminated without cause often retain some rights, unlike those dismissed for cause. A founder who has cleared the cliff and vested, say, 40% of their grant owns real, liquid-in-principle equity — and that equity has to be valued and bought at something close to fair market value.
Addressing buyback rights for vested shares requires a decision made at formation: whether the company will have the right to repurchase vested shares at fair market value upon a founder's departure, and the agreement should specify the valuation method. If that decision was never made, the parties are now improvising it under duress.
The lesson for anyone drafting founders' agreements today is clear. A founders' agreement at incorporation solves the departure scenario before it becomes a crisis, through reverse vesting, company buyback rights at cost for unvested shares, and dispute resolution mechanisms.
The valuation problem: how to price what you cannot easily sell
Pricing a minority stake in a private startup is genuinely hard. There is no active market, no quoted price, and often no recent comparable transaction. The valuation methodologies that apply depend heavily on where the company is in its lifecycle.
Pre-revenue and early-stage companies
For a startup that has not yet reached revenue — or has reached only nominal revenue — traditional earnings-based methods do not work. The company has no normalised earnings to capitalise, and discounted cash flow projections rest on assumptions so uncertain that two people can arrive at valuations that differ by an order of magnitude.
In practice, pre-revenue buyouts are often settled by reference to one of three anchors: (a) the most recent external valuation, such as a post-money valuation from a SAFE round; (b) the aggregate amount of capital invested or sweat equity contributed; or (c) a negotiated "fresh start" price that both sides can live with.
The challenge lies in determining what that ownership interest is truly worth. Without an independent, certified valuation, buyouts can quickly lead to disputes. One party may feel shortchanged while another may overpay.
The cleanest protection at this stage is a formula written into the founders' agreement before anyone wants out. Formula approaches established in buy-sell agreements provide predetermined valuation mechanisms, avoiding the need to negotiate methodology under emotional duress.
Revenue-generating businesses: the three standard approaches
Once a company has meaningful revenue and earnings history, certified appraisers typically reach for three established frameworks, and a credible opinion uses at least two of them. There are three standard approaches to business valuation, and a professional appraiser will typically use more than one.
The income approach values the business based on its ability to generate future earnings. The two most common methods are capitalisation of earnings — which takes the business's normalised earnings and divides by a capitalisation rate that reflects risk, best for stable established businesses — and discounted cash flow, which projects future cash flows and discounts them back to present value.
Capitalised earnings approaches dominate professional service firm buyouts because earnings predictability and stable cash flows support reliable projections. This method calculates normalised earnings by adjusting for owner compensation and non-recurring items, then applies capitalisation rates — typically 20–40% — converting earnings into business value.
The market approach anchors value in observable transactions. It compares financial performance and transaction multiples from similar private companies. Revenue multiple approaches provide simplicity for businesses with consistent profit margins — professional service firms often transact at 0.5–2.0x gross revenue depending on specialty and profitability.
The asset approach is most relevant for capital-intensive businesses. It adjusts balance sheet assets and liabilities to fair market value when tangible assets are significant.
The importance of independent appraisal cannot be overstated. An impartial third-party valuation can help resolve disagreements over equity distribution, buyouts, or intellectual property contributions among co-founders. A certified appraiser also produces a report that survives legal scrutiny, which matters if the deal is later challenged or if the departing founder claims the price was unreasonably low.
Working the number down to the share price
Once the enterprise value is established, the buyout price for the departing founder is a function of their ownership percentage — but it is rarely as simple as multiplying the two figures together. In venture-backed companies, there may be preferred stock with liquidation preferences sitting ahead of common stock. The departing co-founder almost certainly holds common shares, which means their economic interest may be worth significantly less than their percentage of the cap table suggests on a nominal basis.
In non-VC-backed companies — partnerships, LLCs, and bootstrapped corporations — the calculation is more direct but still requires adjustment for minority interest discounts, marketability discounts, and any debt or contingent liabilities sitting on the balance sheet.
Scenario A: the clean early departure
Consider a two-founder startup, 18 months in, with a $1.2 million (AUD ~$1.8 million) post-money valuation from a seed SAFE round. Founder B has vested 37.5% of their original 40% grant — roughly 15% of the total company — having passed the cliff six months ago. The company exercises its option to repurchase the remaining 25% at nominal cost: done, no negotiation required.
For the vested 15%, the parties are looking at a price of roughly $180,000 (AUD ~$270,000) at the SAFE valuation. The company may not have that cash liquid. The departing founder may feel the SAFE valuation underrepresents the company's current potential. This is where payment structuring begins.
Scenario B: the mid-stage departure with real equity at stake
Now consider a three-year-old SaaS company with $800,000 (AUD ~$1.2 million) in annual recurring revenue, no venture investment, and two equal 50% co-founders. One founder wants out. An independent appraiser values the business at $2.4 million (AUD ~$3.6 million) using a blended income and market approach — roughly 3x ARR. The departing founder's 50% stake is therefore worth approximately $1.2 million (AUD ~$1.8 million).
The staying founder does not have $1.2 million in cash. The departing founder needs liquidity but cannot simply hold a passive 50% stake in a company they are leaving. The deal must be structured.
Payment structures: how the money actually moves
Lump sum
A full cash payment at close is the cleanest outcome for the departing founder. It provides immediate certainty, terminates all financial entanglement, and avoids any counterparty risk on future payments. A buyer may have sufficient cash on hand to trade for ownership in a pure cash purchase. It is a simple strategy, but it commonly does not make sense even when the acquirer has access to enough cash.
In co-founder buyouts, a lump sum is most practical when the company has raised institutional capital and investors are motivated to clean up the cap table. Sometimes a venture capital firm or the board of directors will offer to buy out the co-founder's vested stock. In those cases, the departing founder gets a check immediately, and they can move on. The VC firm improves their equity commitment to the company, and no longer has to worry about a significant chunk of the company being owned by a former founder who may not be supportive.
Installment payments (seller financing / promissory note)
When a full lump sum is not feasible, the departing founder effectively finances the purchase. The seller agrees to defer a portion of the purchase price and receives a promissory note for the deferred portion — in other words, the seller funds a portion of the sale, which the buyer pays back over time.
Seller financing in the form of a promissory note is prevalent in smaller transactions, with approximately 70–80% of all transactions having some form of seller financing. The terms of most notes range from three to five years, with interest rates ranging from 5–8%.
A seller promissory note is the legal instrument that makes the debt official. This document outlines the principal amount, the interest rate, and the repayment schedule. Because this is a seller-financed note, the terms are highly negotiable. Unlike a bank loan with rigid terms, the seller note can include flexible payment dates or interest-only periods.
In our Scenario B example, the $1.2 million price is split between a payment at close and a promissory note payable in equal quarterly instalments:
| Scenario B term | Amount |
|---|---|
| Payment at close | $200,000 (AUD ~$300,000) |
| Carried on the promissory note | $1,000,000 (AUD ~$1.5 million) |
| Note term and interest | Four years at 6.5% |
| Equal quarterly instalment, 16 payments | About $71,480 (AUD ~$107,220) |
| Interest paid over the four years | About $143,685 (AUD ~$215,530) |
The staying founder keeps the company cash-flow positive, the departing founder has ongoing income, and both parties have a documented legal obligation.
The risk for the departing founder is significant. Installment payments create credit risk. The departing owner transfers the business interest now but may wait years for full payment. The agreement ought to address protection for that unpaid balance. Protection mechanisms include a lien on company assets, a personal guarantee from the continuing founder, and acceleration clauses triggered by default.
Installment terms need to address interest, maturity, collateral, reporting, default, and acceleration while remaining realistic for the business.
Earnouts
An earnout converts a portion of the purchase price into a conditional payment tied to future business performance. An earnout is a pricing structure in which the sellers must "earn" part of the purchase price based on the performance of the business following the acquisition. Earnouts are often employed when the buyer and seller disagree about the expected growth and future performance of the target company.
A typical earnout takes place over a three- to five-year period after closing and may involve anywhere from ten to fifty percent of the purchase price being deferred over that period.
In a co-founder context, earnouts are most useful when the departing founder believes the company is on the cusp of a step-change in revenue — a product launch, an enterprise contract in the pipeline, a fundraise close to completing — but the staying founder cannot pay for upside that hasn't materialised. The buyer agrees to pay more money only if the business hits specific milestones, such as reaching a revenue goal or maintaining a certain profit margin after the sale. This structure is common when a seller believes the business is about to experience a massive surge in growth, but the buyer is skeptical.
The difference between a seller note and an earnout matters legally and practically. Seller financing differs from earnouts in that a fixed amount and payment schedule are agreed to in advance. In contrast, an earnout is contingent on a future event, and the amount is therefore unpredictable.
The practical downside of earnouts in co-founder situations is that they keep the departing founder financially entangled with a business they no longer control. If the milestones are not hit, disputes follow. Even a careful agreement may produce disagreements. The parties may dispute installment calculations, tax allocations, customer payments, earnout figures, or transition obligations.
Hybrid structures
The most commonly used payment structure combines all three elements. A meaningful down payment at closing provides the departing founder with immediate liquidity and signals good faith. A seller note covers the bulk of the purchase price on a fixed, interest-bearing schedule. A small earnout ties a final tranche to a specific, measurable milestone — ARR crossing a threshold, a key contract renewing, or the company completing a fundraise. Each element serves a different function: the down payment is certainty, the note is structure, and the earnout is an agreed bet on a specific future event.
The closing mechanics: who does what
A co-founder buyout has a closing much like any other business acquisition. The documents required include: the purchase and sale agreement, a stock transfer instrument, IP assignment agreements (confirming all intellectual property created by the departing founder is owned by the company), resignation letters from board seats and officer positions, a release of claims, and the promissory note if applicable.
A co-founder buyout touches corporate, employment, IP, and tax law simultaneously. That interdependency is why the transaction typically involves a closing attorney who coordinates across all of these workstreams. The attorney's job is not merely drafting — it is sequencing: ensuring that the equity transfer, the IP assignments, the resignation documents, and the payment all happen simultaneously so neither party is left exposed.
Trying to handle this without counsel is the most common way founders end up in disputes that derail their next fundraise.
The closing attorney — or in more complex deals, a dedicated settlement agent — also coordinates the flow of funds. Where multiple parties need to receive payments simultaneously at close (for instance, where the company is making a down payment and a VC is separately buying a portion of the departing founder's shares), coordinating those flows is exactly where payment infrastructure matters.
This is where a tool like shaka.deal fits naturally into the hands of the professionals managing this coordination. When a buyout involves a single incoming payment that needs to be distributed simultaneously to multiple recipients — the departing founder, a broker who facilitated the transaction, an advisor whose fee is paid at close — Shaka routes the total amount in one transaction, splitting it to preset addresses at agreed shares, with settlement that is instant and final. There is no sequential transfer, no manual reconciliation, no wire that arrives a day late. The closing attorney defines the split, the payment goes in, and every party receives their allocation in the same transaction. Onchain settlement means the record is immutable: the state of every wallet at close is verifiable by all parties with no ambiguity about whether funds arrived or in what amount.
For attorneys handling multiple co-founder closings per year, the value is in the certainty. Payments cannot be reversed. The settlement record requires no reconciliation. The workflow collapses from multiple wires, multiple confirmations, and multiple follow-up calls into a single coordinated event.
Tax considerations that shape deal structure
The structure of the payment matters enormously for both sides' tax positions, and the closing attorney and accountant need to be aligned on this before terms are agreed.
For the departing founder, a company repurchase of vested shares is treated as a capital gain on the difference between the buyout price and the original cost basis.
For the continuing founder or the company, structuring the transaction as a redemption versus a cross-purchase has different implications for the remaining parties' cost basis and for how the transaction appears on the company's balance sheet. In an LLC, the tax treatment of installment payments can diverge significantly from the treatment in a C-Corp context, adding another layer of complexity.
Interest on a seller note is ordinary income to the departing founder and a deductible expense for the buyer, which is one reason that properly pricing the interest rate on the note — neither too low (which triggers imputed interest rules) nor unnecessarily high — is part of the attorney's job at structuring.
The buy-sell agreement: solving the problem before it exists
Every one of these complications — the valuation methodology, the payment structure, the protections on installments, the triggers for acceleration — can be resolved in advance if the founding agreement includes a well-drafted buy-sell provision. The company or remaining members may elect to purchase a departing member's vested equity. If the parties cannot agree on a price within thirty days, the equity shall be valued by an independent third-party appraiser mutually selected by the parties, with costs shared equally.
Arbitration is faster and cheaper than litigation. Mediation is faster and cheaper than arbitration. The agreement should use the lightest tool first.
A buy-sell agreement drafted at formation should specify: the valuation methodology (or the method for selecting a methodology), the right of first refusal if a founder wants to sell to a third party, the payment timeline and whether installments are permitted, the interest rate on any deferred payments, and the dispute resolution pathway if the parties cannot agree.
Generic templates often have a single line about departures: "If a member leaves, their equity is forfeited." That's not enough. You need different outcomes for different situations, a buyout process with a timeline, and clear definitions of what constitutes "cause."
Common failure modes
Agreeing on price but not on payment. Two founders may agree on a $500,000 price, only to discover that the company cannot fund the down payment and the seller remains liable on the lease. They agreed on value, but not on a workable separation.
Using a single valuation method without cross-checking. A SaaS founder overpaid 30% in a buyout because the valuation ignored customer churn. Within 18 months, cash flow collapsed. The lesson: validate with multiple methods.
No vesting at incorporation. The co-founder of Zipcar had a handshake deal to split equity 50/50. Her co-founder never joined the company full-time, and kept her equity when she left. A structurally similar story has played out in thousands of less-famous companies.
Deferring IP assignment. The buyout agreement may transfer the equity cleanly, but if the departing founder holds patents, domain names, trademarks, or code repositories in their personal name, the company's ownership of its own product is not clean until those assignments are documented and executed at or before close.
Rushing the close before a fundraise. Buyouts often need to close before a fundraise or board meeting, which creates time pressure that leads to under-documented agreements. A rushed close with ambiguous payment terms is almost always worse than a brief delay to do it correctly.
What the professionals managing these deals need
The attorney, accountant, and any broker involved in a co-founder buyout are doing genuinely complex work. They are balancing two clients who have conflicting economic interests while maintaining enough trust to reach a deal. They are navigating valuation methodology, tax structuring, employment law, IP law, and corporate formalities simultaneously. Professionals handling these transactions must be prepared to address the intricate financial and legal concerns from preliminary discussions through closing and disbursement.
What they do not need is the payment infrastructure adding friction at the end. When multiple parties are owed money at close — the departing founder receives a down payment, a transaction broker takes a fee, an advisor who introduced the parties receives a success fee — the coordination of those flows is procedurally simple but operationally slow with traditional wire transfers. Each payment requires its own instruction, its own confirmation, its own follow-up.
Onchain routing through a tool like shaka.deal collapses that coordination into a single transaction. The settlement attorney or closing professional sets the share allocation before the transaction — departing founder gets X%, broker gets Y%, advisor gets Z% — and when the payment comes in, it distributes simultaneously. Instant. Final. No reconciliation needed. The professionals stay focused on the legal and financial substance of the deal; the payment mechanics handle themselves.
The closing principle
A co-founder buyout is a transaction that tests both the legal infrastructure the founders built at incorporation and the quality of the professional advice they receive at the moment of separation. Price it correctly — using at least two valuation methods, independently verified, with clear adjustments for the actual economic interest being transferred. Structure the payment to match what the business can sustain while protecting the departing founder's claim on the deferred portion. Document everything, execute simultaneously, and close cleanly.
The mechanics exist to make this orderly. The professionals who handle it correctly — the attorneys who draft the buy-sell provisions years before they are needed, the appraisers who produce defensible valuations, the closing agents who coordinate the flow of funds with precision — are the ones who turn a potentially destructive event into a transition both parties can live with.
When the payment infrastructure is as clean as the legal work, closings happen on the day they are supposed to.
