Startup Breakups: Protecting Against Co-Founder Conflict

Written by Urouj Rashid
JD Candidate 2027

Note: The below information does not constitute legal advice. No guarantees are made as to accuracy, completeness, or applicability to individual situations.​

Startups tend to start in the same way, with a high degree of optimism, passion, and often teamwork. This passion for pursuing a new business idea serves as the motivator for going on to fulfil larger goals, accompanied by the quiet belief amongst the group that their shared passion, vision, and overall alignment today with last forever.

When ideas go from the talking stage to the execution stage, these partnerships, which often are made of the closest of friends and partners no longer see eye to eye. When the pressure builds, as it most often does in business start-ups, relationships personal and professional are tested, turning the conversation away from business and towards company “politics”. Co-founder disputes are not rare outliers, rather they are one of the most common points of contention in early-stage companies.

Like any relationship that has a falling out, it doesn’t often happen all at once. Falling out of co-founders happen overtime, with relationships eroding as the business starts to grow, whether it be through differences in opinion, strategic visions not aligning, contributions becoming uneven, or commitments changing to name a few. While this can seem manageable at first, such differences quickly begin to impact business decisions, with disagreements resulting in delays and increased conflict. While the emotional aspect may seem to take center stage given the emotions and individuals that may be involved, it really comes down to lack of clarity relating to business structure and governance. It is important to pre-meditate and navigate these areas of potential conflict because the alternative is decision making and negotiating in high stress situations when communication is difficult, trust is low and willingness to cooperate is overshadowed by personal incentive.

Given their good intentions and commitment to the business idea, startups often fail to adequately consider the legal mechanisms and consequences that govern the relationships between co-founders and what safeguards would be in place to protect against them. In the event of a falling out amongst co-founders, the legal consequences primarily depend on the terms set out in the shareholder agreement, supplemented by the applicable legislation.

Shareholder agreements are contractual agreements that may supplement or modify rights that are afforded to individuals under corporate structures.[1] Having a comprehensive shareholder agreement, whether it is structured as a simple voting agreement, or a more complex unanimous shareholders agreement amongst other options, is essential to define how shareholder relationships will work and how founders fit into that structure. The quality of a shareholder agreement is highly relevant if and when co-founder relationships begin to deteriorate. While all business partners are subjected to corporate legislation and general fiduciary duties owed under common law, a well-drafted shareholder agreement would provide clear guidelines for the available legal pathways to use in conflict resolution. [2] The absence of such provisions would leave co-founders without a clear structure to navigate conflict and less efficient and company specific mechanisms for resolving deadlock outcomes.

While the specifics of what is included in each can change from one agreement to another, common provisions that well-drafted shareholder agreements could include, but are not limited to, drag-along rights, tag-along rights, and buyout mechanisms that provide structured exit pathways and prevent minority shareholders from blocking value-maximizing transactions.[3] But before including them, it is important to understand what each is and if it would be relevant to include in your start up agreements. 

As a primary method for resolving situations where co-founders disagree about exit opportunities, drag along rights are an important provision. Specifically, they are designed to prevent minority shareholders from blocking any attractive exit transactions and enabling shareholders to sell their shares on the same terms when the majority want to sell to a third party.[4] Ie. When some of the co-founders receive and wish to accept an acquisition offer but are opposed by others, drag-along rights allow the majority to proceed with the transaction without being restricted by the minority dissent. Most commonly, drag along provisions establish a threshold percentage of shareholder approval, upon the reaching of which all shareholders are obligated to participate in the transaction of interest. This clause comes into play when shareholders meet this threshold agree to the sale of shares to the third party, at which point they are required to provide minority shareholders with written notice with details of the transaction, and obligate them to participate in it on the same terms agreed upon.[5] Drag along rights are not only meant to protect the majority shareholders’ interests by allowing them to make deals they all agree upon without being limited to the whims and desires of minority shareholders but also make the company structure more attractive to investors. [6]  Ultimately, such a clause allows more structured methods to avoid negative consequences for co-founders that may become spiteful, but of course the caveat is that minority co-founders risk having to liquidate their investment against their will.

Another provision that is important to consider in shareholder agreements are tag along or “piggyback” rights. These are intended to protect minority rights and provide non-selling minority shareholders with the option to sell their shares on the same terms (ie. Piggyback) and conditions as selling shareholders, and the third-party purchasers are required to extend their offers to all shareholders as well.[7] In doing so, minority shareholders are protected from being left in unfavorable conditions should there be a change in company control after a sale, which is an important consideration or start up and early-stage companies.[8] Such a clause ensures that all shareholders can benefit equally and are protected from being overlooked in significant transactions.

While both offer protection to different classes of shareholders, majority vs minority interests in the event of the sale of shares, they are not competing clauses and both provisions can co-exist in a shareholder agreement. Well-drafted provisions would allow the start up to better protect its shareholders and simultaneously attract more investors by reflecting consideration and stability amongst the founding team.

[1] Bryce C Tingle, Start-Up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (Toronto: LexisNexis Canada, 2018). [Tingle]

[2] Practical Law Canada Corporate & Securities, “Unanimous Shareholder Agreement for Incorporated Joint Venture (AB)”, Practical Law (3 July 2025).

[3] Tingle, supra note 1

[4] Practical Law Canada Corporate & Securities, “Drag-Along Rights Clause (Shareholder Agreement) (AB)”, Practical Law (13 June 2025).

[5] Ibid

[6] Practical Law Canada Corporate & Securities, “Shareholder Agreement: Drag-Along Rights”, Practical Law (13 June 2025).

[7] Catherine Lovrics, ed, Startup Law 101: A Practical Guide (Toronto: LexisNexis Canada, 2017) at [pinpoint].

[8] Practical Law Canada Corporate & Securities, “Shareholder Agreement: Drag-Along Rights”, Practical Law (Thomson Reuters), online: Westlaw.