Cofounder share buyback valuation is how you price a leaving founder's shares. There are three common methods: a value you agree in advance, an independent appraisal when someone leaves, or a formula. Choose one, plus how the money gets paid, in your agreement before anyone leaves. Then the method sets the price, and nobody has to negotiate it mid-split.
Why can't this wait until someone leaves?
Because a departure is the worst moment to agree a price. The leaving founder wants the highest number they can defend. The company, and the founder who stays, wants the lowest. Both have money riding on it, and the talk usually happens inside a wider falling-out.
A buy-sell clause takes that argument off the table. The trigger, such as a resignation or a firing, starts a process you already agreed. If your agreement says nothing about method, you have not solved the problem. You have moved the fight to a worse time.
What are the main ways to value a cofounder's shares?
O'Flaherty Law sets out three methods for valuing a business in a buy-sell agreement: a value the owners agree in advance, fair market value at the time of sale, and a formula.
| Method | How the price is set | Best for | Main risk |
|---|---|---|---|
| Agreed value | You write a number and update it | Very early teams | It goes stale if nobody updates it |
| Fair market value | An independent appraiser at departure | Companies with revenue | Slow and costs money |
| Formula | A fixed calculation, often from book value or earnings | Most growing startups | Misprices a company that changed shape |
Is book value a fair price?
Rarely, for a working startup. Book value is the assets of the company less its liabilities. It is simple and needs no opinion, which is its appeal. It also ignores customers, brand and growth. For a young company with little on the balance sheet, it can come close to zero, which is unfair to a founder who helped build real traction.
When does an independent appraisal make sense?
When the company has enough revenue for the price to matter. Fair market value is what a willing buyer would pay a willing seller, with neither under pressure. You bring in an appraiser at the time of departure, so the price reflects the company as it is then.
It is the slowest method, and appraisals cost money. RKL notes it "may seem to be the most costly option but often ends up being less expensive", because a bad outcome for one side costs more than the appraisal. Say in the agreement who pays for it, and whether any discounts apply to a minority stake.
How does a formula price work?
A formula sets the price by calculation. One common version multiplies earnings (EBITDA) by a certain number, "usually 2 or 3", sometimes with book value added. You write it once, while you agree, and it applies itself years later.
The catch: formulas can miss growth and intellectual property. A formula written at seed stage can badly misprice a company that has changed shape, so look at it again after each raise. If the ownership split itself now feels wrong, renegotiate the cofounder equity split as a separate conversation.
What gets bought back, and how is it paid?
Only vested shares get the agreed price. Under a standard vesting schedule, the company can buy back unvested shares at the price the founder first paid. Read how a cofounder vesting schedule works and what happens to equity when a cofounder leaves so the two clauses fit.
Then agree how the money is paid. Most early companies cannot pay a lump sum without hurting the business. The usual answer is a down payment with the rest paid in instalments over a few years, written as a promissory note with interest. Put this in the agreement too. A fair price with no realistic way to pay it just moves the fight from "what is it worth" to "when do I get paid."
The valuation method, the triggers and the payment terms all belong in the buy-sell section of your shareholder or founder operating agreement. If a departure is already turning into a dispute, start with our cofounder conflict resolution guide.
Frequently asked questions
- What is the difference between book value and fair market value?
- Book value is the company's assets minus its liabilities, taken from the balance sheet. It is quick and hard to argue with, but it ignores growth, brand and customers, so it usually undervalues a working startup. Fair market value is what a willing buyer would pay a willing seller, normally set by an independent appraiser when someone leaves.
- Why set buyback pricing before a cofounder leaves?
- Because once someone is leaving, the two sides want opposite things. The departing founder wants the highest number and the company wants the lowest, and neither is thinking clearly during a split. A method you agreed while you were still building together turns the departure into a process to follow instead of a fight over the number.
- Are unvested shares included in a cofounder buyback?
- Usually not at full value. Under a standard vesting schedule, the company can buy back unvested shares at the price the founder originally paid, which is often close to nothing. The valuation method in your agreement, whether agreed value, appraisal or a formula, applies to the vested shares the departing founder actually owns.
- Where should buyback pricing terms live?
- In the buy-sell or share repurchase section of your shareholder or cofounder agreement, signed before anyone thinks about leaving. It should name the valuation method, the events that trigger a buyback, and how and when the money gets paid. Then a departure becomes a set of steps to follow, not a negotiation.