Yang's exit is close on the heels of Scott Thompson's elevation as the CEO. Yang was snubbed earlier due to his handling of the Microsoft sale that was aborted midway.
The company stated that Yang will exit his position in the board of directors as well as other positions he holds within the company effective on Tuesday.
Following the news, Yahoo's shares gained 3.4 per cent in after-hours trading on Tuesday.
In Yang's letter to the chairman of the board, he said that he was leaving the company to pursue "other interests outside of Yahoo" and was "enthusiastic" that Thompson was chosen to lead the company.
Yang's official title in Yahoo is "co-founder and chief Yahoo" is also calling it quits from the boards of Yahoo Japan and Alibaba Group Holdings ALIAB.UL. In spite of his effort to revive the ailing Yahoo, he was increasingly being snubbed by investors.
With Yang's exit, the multibillion-dollar deal that will see the selling of Yahoo's prized assets, which is 40 percent slice of China's Alibaba and its stake in Yahoo Japan is expected to fall through soon.