GB
A founder disciplinary issue arises when concerns about a founder’s conduct or performance require formal action - and it is rarely a standard employee disciplinary because the founder may also be a director and shareholder.
Running a fast-growing startup is hard enough without internal conflict. When a co-founder is at the centre of an allegation, the situation can quickly create employment, corporate governance, investor and reputational risks. Each part needs to be handled carefully, and in the right order.
That is exactly what one of our clients, a fast-growing startup, faced when it needed to navigate a sensitive workplace conduct issue involving a co-founder who was also a director and major shareholder. Here is how we helped the business untangle the issues, protect its position and move forward with confidence.
A founder disciplinary issue is a concern about a founder’s conduct, behaviour or performance that may require investigation, disciplinary action or a negotiated exit.
What makes it different is the founder’s dual - and sometimes triple - status. They may be an employee or worker, a statutory director and a shareholder at the same time, so employment law, company law and shareholder rights can all be engaged by the same set of facts.
That means dismissing someone from their job does not automatically remove them as a director or take away their shares. Each relationship has to be considered separately before the company acts.
When Founders Law stepped in, the situation had already been unresolved for some time and was creating a ripple effect across the company. The allegations involved workplace conduct, so this was not simply an internal HR matter. It had serious legal, corporate and investor-related implications.
Unlike a standard employee disciplinary issue, this case required a more joined-up approach because:
The founder’s shareholder status complicated the position. Any decision needed to account for corporate governance, share rights and investor relations, as well as employment law.
A thorough but confidential investigation was essential. Employees needed to feel safe sharing their experiences, while the company needed a fair, properly documented and legally sound process.
The business was already feeling the strain. As the unresolved concerns continued, company culture, leadership confidence and operational efficiency were being affected.
Founder disciplinary cases can engage employment law, directors’ duties and company law, shareholder agreements and articles of association, as well as the rules governing settlement agreements and confidentiality.
Start by establishing the founder’s employment status and reviewing any service agreement, employment contract and disciplinary policy. If the founder is an employee, they may have statutory and contractual protections, including potential unfair dismissal rights depending on the circumstances. Workers also have a statutory right to be accompanied at certain formal disciplinary hearings.
The company should follow a fair process regardless of seniority. This normally means investigating the allegations, explaining the case in writing, giving the founder a proper opportunity to respond, allowing accompaniment where the law requires it, confirming the outcome and offering an appeal. Employment tribunals can take the Acas Code of Practice into account in relevant cases and may adjust compensation where there has been an unreasonable failure to follow it.
If the founder is also a director, the company must deal separately with their corporate office. Ending employment does not, by itself, remove a person from the board.
The articles of association should be checked first, alongside any investment or shareholder documents. If no other valid route applies, section 168 of the Companies Act 2006 provides a statutory process through which shareholders may remove a director by ordinary resolution. That process includes specific notice and representation rights, so it should not be treated as a quick administrative step. Any suspension from day-to-day duties must also be considered separately from removal as a director.
A disciplinary finding or exit may also affect the founder’s shares, but only if the relevant documents say so. Founder or shareholder agreements and the articles may contain bad leaver provisions, compulsory transfer or forfeiture mechanisms, valuation rules, voting restrictions and reserved-matter requirements.
These provisions should be reviewed before the company decides on an outcome. Acting first and checking the documents later can create leverage for the departing founder, trigger a dispute or leave the company unable to deliver the result it expected.
In some cases, a negotiated exit is more commercially sensible than a prolonged disciplinary process. A settlement agreement can record the end of employment, any payment, agreed communications, a reference, confidentiality obligations and the waiver of specified employment claims. To be legally valid as an employment settlement agreement, it must meet statutory requirements, including independent advice for the individual.
The corporate pieces may require separate or additional documents covering resignation as a director, share transfers, releases and ongoing obligations. Confidentiality clauses must also be drafted carefully: they cannot lawfully prevent protected disclosures or appropriate reporting to regulators or law enforcement. Used properly, a coordinated settlement can reduce uncertainty, protect the business and allow all sides to move on.
We knew a standard disciplinary process would not be enough. Our approach balanced legal compliance with commercial practicality:
We led a structured investigation. We advised on a thorough and confidential review, helping the company handle evidence and concerns fairly and sensitively.
We kept key stakeholders engaged. We worked closely with the Board so it could maintain trust with employees, investors and other stakeholders throughout the process.
We negotiated a strategic exit. A prolonged disciplinary battle was not in anyone’s best interests, so we facilitated a reasonable commercial settlement that allowed the founder to leave on agreed terms, reduced legal and reputational risk and supported a smooth leadership transition.
The result was an efficient resolution that protected the company’s legal position and its longer-term business interests.
1. Act early
Do not let concerns sit unresolved. Delay can increase the risks to your culture, reputation, evidence and day-to-day operations.
2. Check your legal position before taking action
Review the founder’s employment or service contract, the articles of association, shareholder or investment agreements, disciplinary policies and any relevant board or shareholder approvals.
3. Run a confidential, properly documented investigation
Establish the facts fairly, limit information to those who need to know and keep a clear written record of the allegations, evidence, meetings and decisions.
4. Keep the Board and key stakeholders appropriately informed
Agree who will manage the process, identify conflicts of interest and give decision-makers the information they need without compromising confidentiality or fairness.
5. Decide what outcome the business is trying to achieve
Consider whether the objective is a formal disciplinary outcome, a change in role or a negotiated exit. Bring in employment and corporate specialists early so the employment, directorship and shareholding steps work together.
Whether you are dealing with a difficult leadership dispute, a founder exit or a wider corporate governance issue, Founders Law can help you connect the employment and corporate pieces and find a practical way forward.
Our team balances legal compliance with commercial strategy, so you can focus on growing the business rather than letting a sensitive issue consume it.
Let’s chat. Get in touch to see how we can support your startup.
We act as an extension of your team and handle any overflow in specialist areas.
Working across five continents, operating in multiple sectors, with over 400 clients.
Offices in London | Dubai.
