When my co-founder told me he was done, my first thought wasn't legal or emotional, it was arithmetic. I had no idea what "buying him out" actually meant in dollars, and neither did he. We spent six weeks and about $14,000 in legal fees finding out.
Most founders picture a co-founder buyout as a single number: some percentage of the last valuation, multiplied by their equity stake, done. That's not how it works, and treating it that way is how founders either overpay by 3x or end up in a standoff that stalls the company. There are four separate cost components, and each one moves independently.
What "value" even means
The last-round price is almost never the right number, and using it is the single most common mistake I see. Our last priced round valued the company at $9M post-money. My co-founder owned 22% after some early dilution, so his naive math put his stake at just under $2M.
But a priced round values preferred stock with liquidation preferences, anti-dilution rights, and board protections. A departing co-founder almost always holds common stock, which is worth meaningfully less, no downside protection, last in line in a liquidation. We used a 409A-adjusted common stock price instead, which came in at roughly 35-40% of the preferred price per share. That single adjustment took his "$2M" stake down to about $770K on paper. This is the conversation to have first, before either side anchors on a number, because anchoring on the wrong base price is what turns a buyout into a fight.
Vested vs. unvested, and the cliff math
Vesting status determines what you're actually buying. If your co-founder is pre-cliff, under 12 months in on a standard four-year schedule with a one-year cliff, you may be buying back zero shares. Unvested equity typically reverts to the option pool for nothing, per most founder agreements. That's a $0 buyout, just an unpleasant conversation and a cap table cleanup.
Our situation was worse: he was 2.3 years in, so 57.5% vested. That meant we were negotiating over $770K times 0.575, roughly $443K of actually-vested value, not the full stake. Get your cap table and vesting schedule pulled up before any numbers get discussed. I've seen founders negotiate off the wrong base for weeks because nobody checked the actual vested percentage first.
Structure changes the real cost by 20-40%
A $443K buyout doesn't cost $443K if you can't pay it in cash, and almost no early-stage company can. We looked at three structures.
Cash lump sum. Would have required a $443K draw against a $1.6M runway. Not viable at our stage; it would have cut our runway by roughly four months.
Promissory note. We structured a three-year note at a modest interest rate, paid quarterly. This is the most common approach for companies without the cash on hand. The real cost here isn't just the $443K principal, it's the interest (we ended up paying about $31K over the term) plus the legal cost of drafting security and default terms into the note (another $4,500 on top of the initial legal spend).
Discounted settlement for speed. Some departing co-founders will accept a discount, 60-75 cents on the dollar, for a faster, cleaner exit instead of a multi-year note with company risk attached. We ended up here: he took a $310K note over 18 months in exchange for certainty and speed, versus $443K over three years with more risk if the company struggled to make payments.
That's the part most founders don't model: the real cost of a buyout is the negotiated value minus whatever discount you can fairly negotiate for taking on payment risk, plus financing costs, plus legal fees on both sides. Expect $8K-$20K combined for a straightforward buyout, more if there's a dispute over valuation.
The cost of doing nothing
The number founders skip entirely is the cost of not buying the co-founder out cleanly. A departed co-founder who keeps a large vested stake and no ongoing involvement is a recurring problem: they show up on your cap table at every future fundraise, investors ask about them in diligence, and you may need their signature for certain corporate actions depending on your governance documents. I've talked to two other founders who skipped the buyout to save cash and both paid for it later, one lost three weeks of a Series A process explaining an inactive 15% holder to a lead investor's counsel.
The math, start to finish
For us: $9M last-round valuation, $770K common-equivalent value, $443K vested, $310K negotiated settlement paid over 18 months, plus roughly $35K in combined legal and financing costs. Total cash cost over 18 months: about $345K, against an initial naive number of $2M. The gap between the number you'll first hear and the number you'll actually pay is almost always structural, not emotional, it comes from stock class, vesting, and payment terms, not from how hard you negotiate on value.
If you're heading into this conversation, do the four-component math before you discuss a single dollar figure with your co-founder: common-stock-adjusted value, vested percentage, payment structure options, and the cost of leaving it unresolved. Whoever brings the real numbers to the table first ends up running a negotiation instead of a standoff.
Frequently asked questions
How do you value a departing co-founder's equity?
Start from a 409A-adjusted common stock price, not the last preferred-round valuation. Common stock lacks liquidation preferences and other protections preferred stock has, so it's typically worth 35-50% less per share than the headline valuation implies.
Can you pay a co-founder buyout over time instead of in cash?
Yes, a promissory note is the most common structure for early-stage companies. Expect to pay interest over the term and additional legal fees to draft security and default terms, which typically adds 5-10% to the total cost.
What happens if you don't buy out a departing co-founder's vested equity?
They remain a shareholder indefinitely. This routinely surfaces during fundraising diligence and can slow down or complicate a future round, especially if the holder is unreachable or uncooperative when a signature is needed.
How much do legal fees typically cost for a co-founder buyout?
Budget $8,000 to $20,000 combined for both sides on a straightforward buyout with no valuation dispute. Contested valuations or complex note structures push costs higher.