Most startup founders hit a point where they need to put a shareholders’ agreement (SHA) in place for their company. For many this can be a daunting task, with around 40 pages of legal language and terms to read and comprehend. Many entrepreneurs are unfamiliar and often out of their depth without knowing it.
Whilst they are not a legal requirement, having an SHA in place can help to prevent future disputes. They provide more flexibility than a company constitution. In most cases, a constitution, along with company records, is available to the public. However, an SHA is a private document. Once in place it will as act as a source of truth for the governance of your company.
There are quite a few options in the market place today where you can grab a template agreement and get started. I would recommend if you haven’t prepared an SHA before that you take the time to understand what they include and what they don’t. This may prevent you from making mistakes and learning the hard way. Seek good legal advice to help you get it right the first time around.
Things you might want to consider before you get started:
1. How will you protect your own rights to remain a director as the founder of the company in the future?
This might sound a little strange but you need to forward think. For example, your SHA may include a clause for shareholders to hold a 20% shareholding to have a right to a board seat. But what happens if, after several rounds of investment, you dilute yourself to below that percentage? You may wish to consider including a clause specific to the founders for a lower percentage than your investors.
2. Give thought to your role within the company as a founder and how this relates to the SHA.
If you have a co-founder, do you intend to be share the role of chief executive? Will you share the responsibilities set out in the agreement for a CEO? This may include financial reporting to the board and record-keeping obligations for the business.
3. Are you aware of possible associated costs?
Most SHA’s expect a D&O (directors & officers) insurance policy to be in place. These policies can be expensive depending on the nature your business. Bear this in mind and get some quotes so there are no nasty surprises waiting for you that you didn’t budget for.
4. Consider if you should include clauses for drags and tags.
These aren’t always standard terms but they can be important to include. For example in the event of an exit, having drag along provisions will allow the majority shareholders to insist on the minority shareholders selling their shares too.
Don’t do it alone, there have been many entrepreneurs who have done this before you! Look to others for help. Ask other founders what they learned from their experience? Take the time to prepare and familiarise yourself. Finally, engage a good lawyer to review or draft your agreement and ensure you have what you need.