Co-founders and the law: equity, decisions and breakups in a Bulgarian OOD

If a partner leaves a Bulgarian OOD, the law gives them the cash value of their share based on the balance sheet, not a slice of future success - so vesting, buy-backs and non-compete terms have to be agreed in writing at the start.

Two or three people decide to build a company together. They register it, split the shares equally or by feel, and get to work. Almost nobody asks what happens if one of them stops working, wants out, dies or starts a competing company. Bulgarian law has an answer to every one of these questions - and it is often not the one founders expect.

This piece is about the relationship between co-founders in an OOD (the Bulgarian limited liability company), the most common legal form for a Bulgarian startup, from the share split to the end of the partnership. We cite the Commerce Act unless another law is named. Where another of our articles already covers a topic, we link to it rather than repeat it. Durations and amounts marked as indicative are estimates from practice, not legal rules; the examples are illustrative.

1. What you are to each other in law

When two or more founders set up an OOD, each becomes a partner - an owner of shares in the capital. A single-member OOD (EOOD) has one owner, who alone takes the decisions of the general meeting (Art. 147(2) of the Commerce Act). Once a second founder joins, everything below applies.

A partner has the right to take part in management through the general meeting, a right to a share of profit, and a right to inspect the company's books (Art. 123). Their duties are to pay in their contribution, to cooperate with the company and to carry out the general meeting's decisions (Art. 124). For the company's debts they are liable only up to their contribution (Art. 113).

The most important distinction is between partner and manager. The partner owns. The manager runs the company and represents it to banks, customers and the state (Art. 141), and may or may not be one of the founders. A partner who is not the manager cannot sign a contract on the company's behalf. This decides who is bound by a non-compete and who carries personal liability.

The relationship between founders lives in two documents:

• The articles of association - the OOD's founding document. It is public (filed in the commercial register) and sets the capital, the shares, the management and the majorities.
• The founders' agreement - a private contract that is not published. This is where vesting, buy-back, non-competes and the rules for a breakup are written.

The founders' agreement binds only those who signed it and cannot be relied on against third parties, but between the founders it is fully valid and gives grounds for a claim for a contractual penalty (an amount fixed in advance for a breach), damages, or the conclusion of a promised contract.

2. The share split

Shares in an OOD follow the capital contribution, not work, ideas or hours. A founder who subscribed 50% for a token contribution owns 50%, whether they work 80 hours a week or stopped the next day. The Commerce Act has no mechanism that redistributes shares according to actual contribution, and a court does not change the split because it seems unfair. Profit is shared in proportion to the shares unless agreed otherwise (Art. 133(1)).

Changing the split later is stricter than most founders assume:

• A transfer between partners is free, with no general meeting decision (Art. 129(1)). If you want control over that too, such as a right of first refusal, write it into the articles of association.
• A transfer to a new person requires the general meeting to admit them by a majority of more than three quarters of the capital, and the company must have no unpaid wages, compensation or social security contributions due to its staff (Art. 129(1)).
• The transfer contract is signed with the signatures and content notarised at the same time and is entered in the commercial register (Art. 129(2)).
• A change in the capital requires the unanimous vote of all partners (Art. 137(3)).

Tax on a share sale is in the tax article. One addition: partners are related persons for tax purposes, so at a price well below market value the tax authorities can apply the market price.

3. Who decides what

The partners' general meeting takes the strategic decisions. The majorities are set by statute, and the articles of association can only raise them:

Decision	Majority	Basis
Annual accounts, profit distribution, appointing and dismissing the manager	More than 1/2 of the capital	Art. 137(3)
Buying and selling real estate	More than 1/2 of the capital	Art. 137(1)⁠(7)
Amending the articles, admitting and expelling a partner, additional cash contributions	More than 3/4 of the capital	Art. 137(3)
Increasing or decreasing the capital	Unanimity of all partners	Art. 137(3)
Voluntary dissolution of the company	3/4 of the capital	Art. 154(1)⁠(2)

Two procedural details are expensive to miss. Decisions to admit or expel a partner, change the capital, appoint a manager or deal in real estate are recorded in minutes with notarised signatures and content, unless the articles allow plain written form (Art. 137(4)); without that form the decision is void, meaning treated as never taken (Art. 137(5)). And the general meeting is called by a written invitation with an agenda, received by every partner at least 7 days in advance (Art. 139(1)).

The manager runs day-to-day business: contracts, hiring, bank accounts. Internal limits on the manager's powers don't apply to third parties: if the manager breaks such a limit, the deal stands, and the manager is liable to the company for the damage (Arts. 141(2) and 145).

Deadlock

A deadlock is a situation in which nobody can muster the majority needed and the company can't decide anything. At 50/50, any decision that needs more than half can be blocked by one founder. Bulgarian law has no mechanism for breaking a deadlock: the court does not appoint an arbiter or an interim manager when the partners can't agree.

An example. Two founders hold 50% each, and one of them is the manager. A fund offers EUR 200,000 for 15% in new shares. The manager is in favour; the other thinks the valuation is too low and votes against. The deal falls through - and not only because of the 50%. An investor coming in through new shares means a capital increase, which requires unanimity: even a partner with 5% can stop the round. In response, the manager stops the payments that need their signature, and the company freezes.

So with any split, the founders' agreement has to say what happens in a deadlock and how the partners commit to vote in a future round. The mechanisms - a mutual buy-out offer (Texas Shootout, Russian Roulette) and a golden share - are described in the corporate structure article. Such a clause is only a contractual obligation: if the seller refuses, the transfer is achieved through the courts (section 7). The alternatives are mediation or arbitration, agreed in advance.

The articles of association can also add higher majorities (for example 80% to sell intellectual property) and a veto right for a partner over a list of matters.

4. When a co-founder leaves voluntarily

Any partner can end their participation by written notice given at least 3 months before the termination date (Art. 125(2)). No consent from the others is needed - when the notice period runs out, the participation ends. The articles can lengthen the notice period but cannot take away the right to leave. A partner who did not vote for additional cash contributions may leave the same way within one month of the meeting (Art. 134(2)).

What the departing partner receives surprises people most. The financial consequences are settled on the balance sheet at the end of the month in which the participation ended (Art. 125(3)). Under the prevailing case law of the Supreme Court of Cassation, this means the book value of the net assets (assets minus liabilities), not the market valuation of the business. In a dispute, the court can appoint an expert to check that the balance sheet was drawn up correctly and assets haven't been understated.

An example. A co-founder with 30% gives notice. At the end of the month the participation ends, the company has assets of EUR 100,000 and liabilities of EUR 60,000 - net assets of EUR 40,000. The departing partner is entitled to 30% of that, i.e. EUR 12,000. The fact that an investor mentioned a EUR 500,000 valuation doesn't change the calculation.

But nobody is obliged to leave: a partner who simply stops working and keeps their shares receives nothing, but loses nothing either. That is how dead equity is born (section 7).

The claim doesn't fall due on the balance-sheet date: if the articles set no deadline, the former partner has to call on the company to pay. For tax purposes the amount is a liquidation share (a payout of a stake on leaving a company), not a sale of shares - the rate is in the tax article.

5. Expelling a partner

Expulsion is the heaviest measure partners have against each other. The law knows two kinds.

Unpaid contribution (Art. 126(1)). The general meeting gives the partner an additional period of at least one month, set by a majority of more than half of the capital, and the manager notifies them in writing and warns them. If they still don't pay, they are deemed expelled by operation of law and lose the contributions made (Art. 126(2)).

Expulsion by decision (Art. 126(3)). The general meeting can expel a partner who fails to cooperate with the company's business, does not carry out its decisions, acts against the company's interests, or has not paid a voted additional cash contribution and did not leave. In Interpretative Decision No. 1/2020 of 31 May 2023 (a ruling that binds the courts on how to read the law), the Supreme Court of Cassation held that conduct as manager can also be grounds for expulsion.

The procedure is formal, and every missed step gives the expelled partner grounds to challenge the decision:

1. A written warning describing the breaches specifically and, where their nature allows, giving a period to stop them.
2. An invitation to a general meeting with expulsion expressly on the agenda.
3. A decision by more than 3/4 of the capital, with notarised minutes unless the articles allow written form. The partner being expelled does not vote, and their stake is deducted when counting the majority (Art. 137(3) and (4)).
4. Entry in the commercial register - as regards third parties, the expulsion takes effect on registration (Art. 140(4)).

The whole procedure takes an indicative 1 to 3 months. The expelled partner can challenge the decision before the district court within 14 days of the meeting if they attended or were properly invited, and otherwise within 14 days of finding out, but no later than 3 months after the meeting (Art. 74).

Two things founders don't expect. First, the expelled partner keeps the right to the value of their stake based on the balance sheet, as on voluntary exit. Second, the company can't simply "set off" against that amount the damage it believes it suffered: the damages claim has to be established - by agreement or by a final court judgment.

The hardest part is proving the ground, because "failing to cooperate" and "acting against the company's interests" are general concepts. The founders' agreement can make them specific: how much time each founder commits and what counts as a breach - for example failing to perform key duties for more than 30 days or leaking confidential information.

6. Death, incapacity and long absence

A partner's participation ends on death or if a court rules they can no longer manage their own affairs - full guardianship (Art. 125(1)(1)). Under the case law of the Supreme Court of Cassation, the heirs do not become partners automatically. They inherit the property right to the value of the shares, from the balance sheet at the end of the month of death. To join the company, they must be admitted as a new partner - by more than 3/4 of the capital. If they are not admitted, the company pays them the value.

For a startup that means either people with no connection to the business enter the general meeting, or the company must find the money at the hardest moment. Two tools answer this: a clause for a buy-out of the shares by the remaining founders at a valuation formula agreed in advance, and key-person life insurance with the company as beneficiary, whose payout covers what is owed to the heirs.

When a founder who is the sole manager is ill for a long time, nobody can sign on the company's behalf. The general meeting can appoint a second manager, and the manager can authorise a procurator, an individual appointed to manage the business (Art. 21). Better to arrange that in advance.

7. Dead equity and vesting under Bulgarian law

Dead equity is a significant stake held by a founder who no longer works for the company. Investors don't want to fund growth that benefits an inactive person who also shares in profit and can block decisions.

An example. A startup is negotiating a EUR 300,000 early-stage (seed) investment. In legal due diligence, the fund finds that 30% of the shares belong to a founder who left in month five. A condition appears in the term sheet (the investor's outline of terms): the shares must be bought back and redistributed before closing. The departed founder realises they hold leverage and asks for EUR 35,000. Cleaning this up after the fact costs an indicative EUR 10,000 to over EUR 50,000 and takes 3 to 12 months of negotiation.

The safeguard is vesting: shares are "earned" over time, and anyone who leaves early gives back the unearned part. The parameters - 4 years with a one-year cliff (an initial period in which nothing is earned), good and bad leaver (leaving for acceptable or unacceptable reasons), acceleration on a sale - are in the capital-raising guide and the corporate structure article. Here: how it works in a Bulgarian OOD.

The Commerce Act doesn't provide for vesting in an OOD: shares are subscribed outright at incorporation. So vesting is built by contract:

• A buy-back option. The founders undertake that if one of them leaves before the agreed period, they will sell their unvested shares to the others at nominal value (the value printed on the share - usually token).
• A preliminary contract. The promise to transfer is framed as a preliminary contract to sell the shares when the departure occurs. Because the final contract needs notarisation, the preliminary one has to be in writing and contain the essential terms (Art. 19(1) and (2) of the Obligations and Contracts Act).
• A contractual penalty. The parties agree an amount the departing founder owes if they refuse to perform (Art. 92 of the same Act). It is due without proof of damage, but the court can reduce it if it is excessive.

What is called "reverse vesting" works in Bulgaria only in this contractual way and does not transfer the shares automatically: every transfer in an OOD needs a notarised contract and registration (Art. 129(2) of the Commerce Act). If the departing founder refuses to go to the notary, the others sue for the conclusion of the final contract, and it is deemed concluded when the judgment becomes final (Art. 19(3) of the Obligations and Contracts Act). Count on the penalty as your main lever for voluntary performance.

An example. With 4-year vesting and a one-year cliff, a 50% founder who leaves in month eight has vested nothing and must transfer their shares at nominal value - in days if they go to the notary, otherwise through a lawsuit and the penalty. Without vesting they keep 50%.

An alternative is a variable-capital company (DPK): share transfers don't need a notary, and the statute expressly provides for rights to acquire shares. Its pros and risks are in the corporate structure article.

8. Code written before the company

The most valuable asset of many startups was written before the company existed - by one of the founders, in the evenings, on their own laptop. In law, that code does not belong to the company.

The author is the individual who created the work (Art. 5 of the Copyright Act). Ideas and concepts are not protected by copyright at all (Art. 4(2)) - what is protected is the code written, not the concept. The rule that gives an employer the rights in computer programs (Art. 14) applies only to an employment relationship. Code written before incorporation, or under a civil contract, stays with its author.

An example. Founder A spends four months writing the platform before registration. Then A and founder B set up a 50/50 OOD and nobody signs anything about the rights. The rights-holder is A as an individual: if they fall out, A can forbid the company from using the software and claim damages. The company B has put a year into has no product.

The fix is a written contract between the author and the company with two decisive elements:

• An express grant of the exclusive rights (only the recipient may use them and authorise others), in writing. Otherwise only a non-exclusive right to use is presumed (Art. 36(4)) - the author can give the same code to someone else.
• A specific description of what is transferred - which programs and repositories, which rights, for what term and territory, and for what consideration.

No notarisation is needed, unlike a share transfer.

The right to be recognised as the author stays with the person and cannot be transferred. But whoever lawfully acquired the right to use a computer program may adapt and modify it as far as necessary for the purpose for which they acquired it, unless agreed otherwise (Art. 70). The founders' agreement should include consent to modifications and to using the code without naming the author after they leave.

Code by employees and contractors is in the employment law article, and why a broken chain of rights sinks investments is in the capital-raising guide.

9. A former co-founder as a competitor

The statutory non-compete in an OOD covers only the manager. Without the company's consent, where the activity is similar, the manager may not do business, take part in other companies or hold a management position in them (Art. 142(1) and (2) of the Commerce Act). A breach makes them liable for damages (Art. 142(3)).

A partner who is not the manager has no statutory restriction and can lawfully take part in a competing company unless they have contractually undertaken not to. And after leaving, nobody has a statutory restriction.

An example. A co-founder leaves and a month later launches the same product, taking the three biggest customers with them. If they weren't the manager and there is no clause, the company can't stop them; if there is a restriction with compensation and a penalty, it can sue and ask for interim measures (a temporary order freezing assets until the court rules).

A post-exit non-compete is valid only with a reasonable duration, a clearly defined subject-matter and geographic scope, and compensation for the restricted period; without compensation it risks being declared void. How these conditions have been developed, and why the same clause in an employment contract is void, is in the employment law article. Separate is non-solicitation of staff and customers: it doesn't restrict the right to work in general and is accepted more readily.

10. Risks around the partnership

A co-founder's personal creditor. A creditor can't take the company's assets, but can attach the debtor's stake - a court-ordered ban on the debtor disposing of it (Art. 517(1) of the Civil Procedure Code). The bailiff then serves the company with a declaration terminating the debtor's participation. After 3 months, the creditor can sue to dissolve the entire company. The court dismisses the claim if the company has paid the creditor the balance-sheet value of the stake or the claim has been satisfied (Art. 517(3)). One founder's personal debt can force the company to find cash for that stake to avoid dissolution.

Minority rights. Partners holding more than 1/10 of the capital can ask the manager in writing to call a general meeting and, if the manager doesn't within 2 weeks, call it themselves (Art. 138(2) of the Commerce Act). Any partner can ask the court to set aside a decision that breaches the law or the articles, within the deadlines in Art. 74 (section 5). The decision to sue the manager is taken by the general meeting (Art. 137(1)(8)).

The manager's personal liability. A founder who is also the manager carries risks the others don't: to the company, for damage from culpable failure to perform (Art. 145); to the state, for unpaid taxes and social security where the manager concealed facts they were obliged to declare, or in bad faith made payments amounting to a hidden profit distribution or sold assets well below market price, and as a result the debts can't be collected (Art. 19 of the Tax and Social Security Procedure Code; what counts as hidden profit distribution is in the tax article); and criminal, if the company is insolvent and the manager doesn't apply to open insolvency proceedings within 30 days of payments stopping (Art. 227b of the Criminal Code).

We've collected other costly founder mistakes - from IP to tax - in one place.

11. The end: liquidation and court dissolution

Voluntary liquidation (winding the company up: settling its debts and distributing what is left). The partners can dissolve the company by 3/4 of the capital, unless the articles require more (Art. 154(1)(2) of the Commerce Act). The liquidator is the manager unless someone else is appointed (Art. 156(2)). The liquidator invites creditors to lodge claims - in writing to known creditors and by notice in the commercial register (Art. 267) - and assets are distributed among the partners only once 6 months have passed since the notice was published (Art. 272(1)). Liquidation takes an indicative 8 to 12 months or more. What remains is shared among the partners (Art. 271), and the tax on the liquidation share is in the tax article.

Court dissolution. When the founders are in an irreconcilable conflict and the company can't function, partners holding more than 1/5 of the capital can ask the district court to dissolve it for important reasons (Art. 155(1)) - a lasting deadlock, general meetings not being held, inability to pursue its objectives. The case can go through three instances and takes an indicative eighteen months to more than three years, during which the business usually loses its customers and its value. The outcome isn't what most people expect: the court doesn't "split" the business between the founders. It dissolves the company, and liquidation follows.

12. What the founders' agreement should contain

• Shares and contributions, including future funding.
• Vesting with a cliff, a schedule and rules on a sale, plus the mechanics: option, preliminary contract and penalty.
• Roles and commitment - responsibilities, minimum time, measurable goals.
• Decisions and deadlock - thresholds, matters subject to veto, a deadlock mechanism and a commitment to vote in a future round.
• A buy-back right and a right of first refusal with a clear price formula.
• Intellectual property - a written grant of all existing and future rights in code, design and trademarks.
• Non-compete and non-solicitation for the life of the partnership and a set period after it, with compensation and a penalty.
• Grounds for expulsion, made specific.
• Death, incapacity and attachment of shares - buy-out by formula and insurance.
• Exit - how money is split on a sale or liquidation, and rights on a sale: tag-along (a minority can join the majority's sale) and drag-along (the majority can force the minority to sell).

Some of the rules - higher majorities, transfer restrictions, the form of the minutes - also have to go into the articles of association to bind third parties. Both documents are written at the start, while the founders still want the same thing.

This article is part of our overview of the Bulgarian laws every startup should know.