Right, so you have a brilliant business idea and superb founder team to execute the idea. You all know each other and have, perhaps, even worked together in the past. Should you dive into the execution of your vision or should you first sign a shareholders’ agreement?
Well, anyone with half a brain knows that a shareholders’ agreement (“SHA”) is of vital importance when comes to start-ups. SHA establishes certain rights and obligations for the founders or shareholders and the macro-level idea of the SHA is to create common ground rules that will be applied in the day-to-day operations of the company (when things are going well) or in case friction arises between the founders or shareholders (when things are not going well).
Once the SHA is signed it will typically end up in a drawer. Things are going well, no point to nitpick, everything is going according to plan. Occasionally the founders may need to check what were the rules about voting in case of additional finance, applying for a loan, changing the articles of association, or making some other big decision. However, when trouble looms on the horizon the SHA will become vitally important for the company and the founders. Maybe one of the founders is creating issues for the business and you may wonder whether you can get rid of that person, what happens to his/her shares or is he/she a bad leaver or what is going on? It is precisely in the less than desirable situation where a well-drafted SHA is worth its weight in gold.
Besides the market practice boilerplate stuff, it is important to pay close attention to the following clauses when drafting a shareholders’ agreement: future financing, issue of shares, decision-making in the company (both shareholders’ meeting and board), non-competition & non-solicitation, IPRs, share transfers, bad leaver provisions, confidentiality, breach & indemnification.
Although it may sound self-evident, it is important to draft the SHA to match the needs of the company, business, and the founder/shareholder team. The SHA needs to be pragmatic, easy to understand and easy to use in difficult situations. If everyone understands the rules on day 1, the probability of future disputes is lowered significantly. As an example, it may be a wise choice to agree on stricter bad leaver provisions, for example, for the first 12 months so that you do not have to worry about the equity if someone decides to exit for one reason or another.
As a conclusion, it is very important to understand what the company needs and the business dictates in terms of the SHA. Not all businesses are similar and not all founder/shareholder teams are similar. When the first SHA is drafted and signed on day 1, people are optimistic and happy about the business and may not pay enough attention to detail. Moreover, the time horizon of the SHA may be longer than just one or two years (although if the company aims to raise finance, the VCs will typically introduce their own SHA template as part of the deal), which means that you need to have a forward-looking view in terms of rights, obligations, business, and risks. One size may not fit all, and we recommend you to have a chat with your advisor before signing any shareholders’ agreements.
