Do I Need A Solicitor To Buy Out A Co-Founder?

Priya and Tom started a subscription coffee business together. Priya handled suppliers and operations, while Tom built the website and brand. Two years in, Tom wants to leave and Priya wants to keep the company moving without a messy dispute.

That kind of founder split can feel personal, commercial and legal all at once. You may be thinking about the price for the shares, but the real job is bigger: shares, Companies House records, director resignation, IP ownership, confidential information and final settlement terms all need to line up.

The good news is that a co-founder buyout can be handled cleanly if you slow down and document the right things before money changes hands.

Do I Need A Solicitor To Buy Out A Co-Founder?

No, UK law doesn't always require you to use a solicitor to buy out a co-founder, but getting legal help is usually a smart move where shares, IP, debt, employment or director duties are involved.

A founder buyout is rarely just a simple payment for shares. You may need to deal with:

• who owns the shares now and whether they can be transferred
• whether your articles of association or shareholders agreement give anyone pre-emption rights
• whether the leaving co-founder is also resigning as a director, employee or consultant
• whether any code, designs, brand assets, customer lists or domain names are owned by the company
• whether the leaving founder will keep any rights to future payments or dividends
• what both sides can say about the split after it happens

If you miss one of those points, you can end up with an incomplete exit. For example, your Companies House record might show the founder is no longer a director, but they may still own 30% of the shares. Or you may buy their shares, only to discover later that key software was never assigned to the company.

A tailored co-founder separation agreement helps you deal with the commercial deal and the legal clean-up at the same time. Templates can be useful as a starting point, but they often miss the specific company documents, IP history and director issues that matter in a founder separation.

What Should You Check Before Agreeing A Founder Buyout?

You should check your company documents before you agree the price or sign anything, because they may control whether the buyout can happen and on what terms.

Start with these documents:

• Articles of association: These are your company's constitutional rules under the Companies Act 2006. They may restrict transfers, require board approval or set out pre-emption rights.
• Shareholders agreement: This may include good leaver and bad leaver rules, valuation methods, compulsory transfer events, dispute processes and drag or tag rights.
• Subscription or investment agreements: If you have investors, a share subscription agreement may give them consent rights or special share rights.
• Option plans: If the leaving founder has options or promised equity, check any share vesting agreement, vesting schedule and leaver rules.
• Employment or consultancy agreement: This may affect notice, restrictive covenants, confidentiality and IP.
• Company records: Check the register of members and the information held at Companies House for directors and PSCs, not just informal records.

Be careful not to rely only on what you remember agreeing over WhatsApp or email. The legal position usually starts with the company's formal documents, the register of members and Companies House records.

A Worked Example

Say Priya owns 60 shares and Tom owns 40 shares in their UK limited company. Tom agrees to sell his 40 shares to Priya for GBP 20,000.

Before Priya pays, she checks the shareholders agreement. It says any founder leaving within three years must offer their shares to the other shareholders first, and the board must approve the transfer. It also says all product IP must belong to the company.

That means Priya needs more than a bank transfer. She needs board approval, a share transfer document, an updated register of members, IP confirmation from Tom, Companies House updates for Tom's director resignation and PSC changes, and a settlement clause saying Tom has no further claim against the company.

What Documents Do You Need For A Co-Founder Leaving The Company?

You usually need a founder buyout agreement plus the supporting documents that actually implement the exit.

The exact documents depend on your company structure, but a clean co-founder buyout often includes:

• Founder buyout agreement or settlement agreement: Sets out the deal, payment, releases, confidentiality and what each side must do.
• Share transfer agreement: Records the sale of the leaving founder's shares and any promises about title to those shares.
• Stock transfer form: Often a form J30 for ordinary shares, used to transfer certificated shares.
• Board minutes or written resolutions: Approve the transfer if required and record key company decisions.
• Director resignation letter: Confirms the leaving founder resigns as a director.
• IP assignment or confirmation deed: Confirms the company owns business IP created by the founder.
• Register of members update: Updates the company's share ownership record where relevant.
• Companies House filings: Records changes to directors and PSCs, and reports shareholdings through the correct process.

Founder Buyout Agreement Outline

A lawyer should tailor this before you use it, but a practical founder buyout agreement usually covers:

1. Parties: Name the company, the remaining founder and the leaving founder.
2. Background: Briefly explain the founder's roles, shareholding and reason for the exit.
3. Shares Being Sold: List the number and class of shares and who is buying them.
4. Price And Payment: Set out the amount, timing, instalments and what happens if payment is late.
5. Completion Steps: List what must be signed, delivered and approved before completion.
6. Director Or Employee Exit: Cover resignation, notice, final pay and return of company property.
7. IP And Confidentiality: Confirm company ownership of IP and ongoing confidentiality obligations.
8. Restrictive Covenants: Include any agreed non-solicit or non-compete wording if it's reasonable and enforceable.
9. Releases And Claims: Confirm what claims are being released and whether anything is carved out.
10. Announcements: Agree what you'll tell staff, customers, suppliers and investors.

This document is where you stop the loose ends from becoming future arguments.

How Do You Transfer A Founder's Shares?

You transfer a founder's shares by following your company documents, signing the transfer paperwork, paying any stamp duty that applies, updating the company's register of members and reporting the new share position to Companies House through the right route.

For a typical private company limited by shares, the process looks like this:

1. Check Restrictions: Review the articles and shareholders agreement for pre-emption rights, board approval and leaver provisions.
2. Agree The Deal: Confirm the number of shares, price, completion date and payment method.
3. Sign The Share Transfer Documents: This may include a share transfer agreement and stock transfer form.
4. Deal With Stamp Duty: If the consideration is over GBP 1,000, HMRC stamp duty can apply at 0.5% of the consideration, rounded up to the nearest GBP 5. HMRC stamping rules and processes should be checked before completion.
5. Board Approval: The directors approve and register the transfer if your articles require it.
6. Update The Register Of Members: The buyer becomes the legal shareholder when entered in the company's register of members.
7. Issue A Share Certificate: The company issues a new certificate to the buyer and cancels or updates the old one.
8. Update Companies House: Share transfers are usually reported in the next confirmation statement rather than immediately, unless another filing is triggered.

Using Priya and Tom's example, the GBP 20,000 share sale could attract GBP 100 stamp duty, because 0.5% of GBP 20,000 is GBP 100. Priya shouldn't just pay Tom and put the receipt in a folder. The company needs the signed transfer, any HMRC stamping, board approval, updated register of members and a future confirmation statement showing Priya now owns 100 shares.

Companies House doesn't decide who owns your shares day to day. Your company's internal register of members is the key record, so don't leave it out.

How Do You Remove A Co-Founder As A Director Or PSC?

You remove a co-founder as a director by dealing with their resignation or removal properly and filing the correct Companies House form, but that doesn't automatically remove them as a shareholder.

If the leaving founder resigns voluntarily, you would usually:

1. get a signed director resignation letter
2. hold a board meeting or sign board minutes noting the resignation
3. file form TM01 at Companies House within 14 days of the resignation
4. make the Companies House filing within 14 days and update internal governance records, bank mandates and access permissions
5. remove or update software, payment platform and signing authorities

If they won't resign, removing a director can be more sensitive. The Companies Act 2006 has a shareholder process for removal by ordinary resolution, but you need to follow the rules carefully and check your articles, shareholders agreement and any employment rights. If the person is also an employee, the Employment Rights Act 1996 and ACAS guidance may become relevant, especially if dismissal is being considered.

What About PSC Changes?

If the buyout changes who has significant control, you may need to update the information held at Companies House. A person is commonly a PSC if they hold more than 25% of the shares or voting rights, or otherwise have significant influence or control.

Companies must notify Companies House of confirmed PSC changes within the required statutory timeframe, generally within 14 days of confirmation. You should also check the current Companies House process for the relevant PSC change, as the filing route can depend on what has changed. If Tom sells his 40% shareholding to Priya, Tom may stop being a PSC and Priya's level of control may change, so this needs to be recorded at Companies House.

Companies House identity verification is now mandatory for directors and PSCs. New directors and PSCs generally need to provide a Companies House personal code as part of the relevant appointment or PSC process, while existing directors and PSCs have role-specific timing rules.

Don't Forget IP, Logins And Confidential Information

A founder can leave the board and sell their shares, but still create problems if IP and access rights aren't dealt with.

Before completion, check who owns or controls:

• domain names and hosting accounts
• source code and repositories
• trade marks, logos and brand files
• customer databases and supplier lists
• social media accounts and ad accounts
• product designs, manuals, training materials and templates
• password managers, payment platforms and analytics tools

Copyright usually belongs to the creator unless it has been assigned or was created by an employee in the course of employment. If your co-founder was a consultant, contractor or unpaid founder, don't assume the company owns everything they created. You may need an IP assignment signed as part of the exit.

You should also deal with UK GDPR and the Data Protection Act 2018 if the leaving founder had access to personal data. Remove access, recover devices, change shared passwords and keep a record of what was returned or deleted.

Key Takeaways

• You don't legally need a solicitor for every co-founder buyout, but a tailored legal document helps keep the share transfer, resignation, IP and settlement terms aligned.
• Check your articles, shareholders agreement, investor documents, register of members and Companies House records before agreeing the deal.
• A share transfer usually needs signed documents, possible HMRC stamp duty, board approval, a register of members update and later Companies House reporting.
• Removing a co-founder as a director is separate from buying their shares. TM01 is usually due within 14 days of resignation.
• PSC changes, identity verification, IP ownership, confidential information, logins and data access are just as important as the purchase price.
• If the split is tense, get the paperwork right before payment so you don't leave loose ends behind.

If you'd like help with your founder buyout agreement, share transfer documents, director resignation steps or IP ownership clean-up, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.