Can a founder remove a co-founder who is no longer working?

A Pakistani startup may be able to remove a co-founder from an executive role or directorship, but it cannot ordinarily cancel that person's shares simply because the co-founder stopped working. The distinction between employment, management, board office and equity ownership is fundamental. A founder may be a chief technology officer, director and shareholder at the same time, yet each position carries different rights and procedures. A company that ignores these distinctions can turn an operational problem into shareholder litigation.

The starting documents are the company's articles, register of members, director records, employment or service agreement, founders' agreement and any vesting or transfer obligations. The board must establish what the co-founder actually agreed to perform and which legal relationship the company wishes to change. Mere frustration with the co-founder's contribution is not a substitute for an identifiable contractual or statutory ground.

Identify the co-founder's different legal capacities

An individual may hold issued shares, be appointed director and work as an employee or consultant. Terminating an employment relationship does not automatically remove the person from the statutory register of members. Equally, having a substantial shareholding does not necessarily entitle the person to remain chief executive under every possible set of circumstances.

The company should prepare a role matrix stating how each relationship arose, which instrument governs it and what process can lawfully end or modify it. That helps prevent an employment termination letter from purporting to revoke ownership or amend the company's articles.

Employment and service-contract obligations

If the co-founder is employed, examine notice, defined duties, misconduct procedures, performance targets and contractual remedies. Applicable labour law and the employee's classification may affect the process. A founder-level executive governed primarily by contract should not automatically be treated identically to a covered workman under provincial employment legislation.

Before alleging breach, document the actual missed duties, support provided and previous warnings or agreements. Performance concerns may justify management changes, but an employer should avoid inventing misconduct simply to force a cheap share transfer.

Removal from the board

A directorship is a statutory corporate office. Appointment and removal must be examined under the Companies Act, 2017, articles and applicable shareholder rights. Notice, voting procedure, filings and protections may differ from an executive dismissal. A shareholder agreement may include nomination rights or restrictions affecting the outcome.

The majority shareholder should not assume that possession of banking credentials or an internal board vote alone resolves every removal requirement. Conversely, a director who no longer holds a management role does not gain unlimited authority to control daily operations merely because the director continues to sit on the board.

Issued shares cannot simply be forfeited

Where the departing founder has already been validly allotted shares, the company must respect statutory ownership and any lawful transfer provisions. A board resolution reading 'shares cancelled due to non-performance' may be insufficient or unlawful if no proper mechanism exists. Restrictions in the articles, valid call-option arrangements and the shareholders' agreement require careful examination.

A company should determine whether the shares were fully paid, issued subject to lawful conditions, or subject to a contractually enforceable repurchase or transfer right. Those details materially change the available remedies. The cap table is a legal record, not merely a founder performance scorecard.

Vesting and leaver provisions

If the founders agreed on vesting, identify what has vested and the treatment of unvested rights. Good-leaver and bad-leaver definitions may determine price, triggering events and transfer procedure, subject to applicable law. The clause should be applied fairly and precisely rather than used as a pretext to confiscate all equity.

A foreign template may require adaptation because a contractual promise to transfer shares needs to work within Pakistan's corporate procedures. Where no vesting arrangement exists, the company cannot simply invent one retrospectively after the relationship fails.

Disputes about intellectual property

A departing technical founder may have written the platform, personally registered a domain or maintained exclusive access to the cloud account. Ownership and operational control must be separated from the equity dispute. The company should examine signed assignments, licences and confidentiality obligations before asserting exclusive title.

Neither side should use unauthorised deletion, service disruption or removal of repositories as leverage. A lawful transition should protect customer data, business continuity and evidence of development, with appropriate access changes recorded and independently administered.

Confidentiality and competition concerns

The startup may need to protect customer lists, pricing information, unreleased software and business strategies. Existing confidentiality clauses should be enforced according to their terms and the applicable law. A broad prohibition on all future employment or business activity may face enforceability issues under restraints-of-trade principles.

The company should not assume that retaining shares grants a departing founder unrestricted access to every trade secret. The individual may have certain statutory shareholder information rights, but those rights are not identical to operational administrator access.

Negotiated buyout or separation

A negotiated arrangement may be more efficient than litigation. The parties can consider an agreed share transfer, fair valuation, payment schedule, mutual release, transitional consultancy, confidentiality and non-disparagement provisions where lawful. The company should obtain proper approvals and ensure any transfer complies with articles and applicable statutory requirements.

Valuation should reflect the company's actual position, outstanding investments, shareholder loans, dilution and restrictions. A buyout process that leaves the company unable to fund payroll may not be commercially sustainable. The identity of the purchaser—company, other founder or third party—can affect legal requirements.

Deadlock and minority-shareholder remedies

When founders each hold fifty percent, disagreements can paralyse board or shareholder decisions. A binding deadlock process, mediation or agreed buy-sell mechanism may offer a route, but the availability and fairness of specific mechanisms depend on the instruments. The parties should check whether statutory corporate remedies are appropriate where management conduct becomes oppressive or unlawful.

The court is not a substitute for a missing founders' agreement in every commercial disagreement. The claimant must establish a legally recognised right and proper relief. Carefully drafted governing documents reduce the need to seek emergency intervention.

Practical example: a departing software founder

Suppose two founders own equal shares, one handling sales and the other developing the product. The developer stops working after eight months but retains shares and control of the source repository. The working founder cannot simply cancel the developer's fifty-percent holding; ownership and any vesting agreement require separate examination.

The company may lawfully replace the CTO after following the applicable procedure and secure its own infrastructure. If the developer's shares are subject to a valid repurchase arrangement, the parties should implement that arrangement properly. Otherwise, a negotiated sale or legally supported corporate remedy may be necessary.

Opinion and recommended course

A co-founder can potentially be removed from employment or management, and from the board through an appropriate corporate procedure, without that automatically extinguishing share ownership. The company should first identify each legal capacity and examine the precise documents governing it. A disciplinary or operational decision must not be disguised as unilateral confiscation of equity.

Preserve company records, clarify IP rights and explore a lawful separation or buyout with reliable valuation and approvals. Future founders' agreements should address vesting, leaver events, deadlock, share transfers, management authority and confidentiality from the outset.

Principal authorities for verification: Companies Act, 2017 and Companies Regulations, 2024; applicable company articles, shareholders' agreements and employment contracts; Contract Act, 1872; relevant intellectual-property and employment law.