When a Co-Founder Leaves or Stops Working: Startup Equity Disputes in California

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

Your co-founder stopped working months ago and still holds a large block of stock. Can the company take the shares back? In California, usually only if a document gives it that right. Founder shares issued outright, with no vesting schedule or repurchase agreement, generally stay with the founder. The board can remove a co-founder as an officer, because officers generally serve at its pleasure, but that does not cancel shares. (Corp. Code, § 312, subd. (b).) Kolmogorov Law, P.C. handles co-founder disputes in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss a co-founder who has left, checked out, or is trying to push you out.

Start with the paper

I begin every co-founder dispute with the same inventory. What did the founders actually sign?

Look for a stock purchase agreement with vesting and a repurchase option. Look for a shareholder agreement, the bylaws, an invention assignment, and any employment or offer letter. Pull the stock ledger and the board consents that issued the shares.

Many young companies have less than they think. The incorporation service produced articles and bylaws, the founders split the stock, and nothing else was signed. That gap decides most of what follows.

If the shares vest: the repurchase right

Vesting usually works through a repurchase option. The founder owns all the shares from day one, and the company may buy back the unvested portion at a low price if the founder's service ends.

Three things go wrong. The company misses the window to exercise, which many agreements set at a fixed number of days after termination. The parties disagree about when service ended, which matters when a founder drifted away instead of resigning. Or an acceleration clause turns on whether the departure was a termination "without cause."

These are contract questions, and the wording controls. Our page on buy-sell agreement disputes covers the same mechanics in established companies.

If there is no vesting schedule

Then the shares generally belong to the founder who holds them. Shares issued for proper consideration are treated as fully paid, and the holder owes nothing further for them. (Corp. Code, § 409, subd. (b).) Nothing in that rule returns stock to the company because an owner stops showing up.

That leaves three avenues, none of them quick.

Negotiate. A departed founder with a large stake and no role often wants liquidity, and the company wants a clean capitalization table before its next financing. There is usually a price.

Check how the shares were issued. Shares may be issued for money paid, labor done, services actually rendered, or property actually received. Future services do not count as payment. (Corp. Code, § 409, subd. (a)(1).) The statute does not say what happens to stock issued purely against a promise of future work, and absent fraud the board's judgment on the value of the consideration is conclusive. (Corp. Code, § 409, subd. (b).) Treat this as a point for negotiation that depends on the board consents, not as a way to cancel shares.

Look at what the founder promised and did. A founder who competed with the company while still an officer, kept company property, or walked away from a written commitment may face contract or fiduciary duty claims that become part of the negotiation.

Removing a co-founder: officer, director, shareholder

Founders tend to treat "getting someone out" as one event. The law treats it as three.

Officer. Unless the articles or bylaws say otherwise, officers are chosen by the board and serve at its pleasure, subject to any rights under an employment contract. (Corp. Code, § 312, subd. (b).) A board majority can end a co-founder's role as CEO or CTO.

Director. Directors may be removed without cause by a vote of the outstanding shares. But unless the whole board is removed, a director cannot be removed if the votes against removal would be enough to elect that director under cumulative voting. (Corp. Code, § 303, subd. (a)(1).) A large minority holder can often keep a board seat.

Shareholder. Stock changes hands by contract or by purchase. Unless the agreement says otherwise, a founder who has been fired remains a shareholder, with a shareholder's rights, until the shares are actually bought. (Stephenson v. Drever (1997) 16 Cal.4th 1167, 1174.) The Supreme Court would not read a repurchase agreement as freeing the controlling owner from fiduciary duties in the meantime. (Id. at pp. 1178-1179.)

Who owns the code and the brand

This is often the departing founder's strongest card.

Copyright in a work vests initially in its author. (17 U.S.C. § 201(a).) A transfer of copyright ownership, other than by operation of law, requires a writing signed by the owner or the owner's authorized agent. (17 U.S.C. § 204(a).) Code, designs, and content created before the company existed, or created by a founder who was never an employee and never signed an assignment, may still belong to that founder personally. Our page on copyright ownership and work made for hire explains the employee and contractor rules.

Inventions raise a parallel issue. California limits how far an employment agreement can reach inventions an employee developed entirely on personal time without the employer's resources. (Lab. Code, § 2870, subd. (a).) Our page on invention assignment agreements covers the exceptions.

Fix the assignments while everyone is still speaking. Afterward, a signature becomes a bargaining chip.

Promised equity that was never documented

The reverse problem is just as common. Someone worked for a year on the strength of "you'll have twenty percent," and no shares were ever issued.

Those claims are brought as breach of an oral contract, with promissory estoppel and the reasonable value of the work as fallbacks. The evidence is whatever shows the terms: texts, emails, draft capitalization tables, pitch decks listing the person as a co-founder. If you are the company, resolve the claim before a financing. Investors ask about it.

Deadlock between equal founders

Two founders with equal shares and two board seats can stop a company cold. If the documents contain no tiebreaker, the options on our 50/50 deadlock page apply: a negotiated exit, or a dissolution suit on statutory grounds, where the other side may elect a buyout. General startup planning is covered on our startup law page.

What to bring to the first meeting

Bring the articles, bylaws, stock ledger, and every board or shareholder consent. Add each founder's stock purchase agreement, any vesting or repurchase terms, invention assignments, and employment letters. Include the messages in which roles, equity, or the departure were discussed, and a timeline of who did what and when.

Frequently asked questions

My co-founder stopped working six months ago but still holds 40 percent of the company. Can we get the shares back?

Usually only if an agreement gives the company a repurchase right. If the shares were subject to vesting, the unvested portion can usually be bought back at the contract price after service ends, provided the company exercises the option on time. If the shares were issued outright, they generally stay with the founder under California law even after the work stops, and the practical path is a negotiated buyback.

Can a co-founder be fired from their own company?

From the job, yes. Under Corporations Code section 312, unless the articles or bylaws say otherwise, officers of a California corporation serve at the pleasure of the board, subject to any employment contract. Removal as an officer does not remove the person as a director or shareholder. A director is ordinarily removed by shareholder vote, and shares usually change hands only under a contract or a negotiated purchase.

My co-founder wrote most of our code before we incorporated and never signed an IP assignment. Who owns the software now?

Probably your co-founder, until an assignment is signed. For a California startup the answer comes from federal copyright law: ownership vests initially in the author, and a transfer of ownership generally is not valid without a signed writing. A company that did not yet exist could not have employed anyone when the code was written. Get a written assignment in place before the relationship deteriorates further.

What happens to founder shares with no vesting schedule?

They generally belong to the founder outright. Without a vesting schedule or repurchase agreement, a California corporation ordinarily has no right to reclaim issued shares because a founder leaves or contributes less than expected. The remaining founders can negotiate a buyback, pursue claims for commitments the departing founder broke, or review how the shares were paid for when they were issued.

Is a verbal promise of startup equity enforceable in California?

It can be, but proof is the difficulty. An oral agreement to issue equity in exchange for work may be enforced as a contract if its terms are definite enough. Where they are not, the reasonable value of services may still be claimed, and promissory estoppel requires a clear promise. Texts, emails, and documents naming the person as an owner are the usual evidence in California cases.

Talk to a California co-founder dispute attorney

If a co-founder has left with a large stake, or you are the founder being pushed out, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents founders and companies in Orange County, Los Angeles, and throughout California. We litigate and negotiate these disputes; we do not handle financings or securities offerings. Our partnership and shareholder dispute practice page has more.

This page provides general information about California law and is not legal advice. Outcomes depend on the documents, the facts, and the court.