Shareholders’ agreement - Why is so important?

Not one, but often several people set up a startup. This is a good solution to share the risk among shareholders, but it also complicates the management of the company. To avoid such complications, it is best to sign a shareholders’ agreement. What is such an agreement and at what point in the development of a startup should it be created?

Shareholders’ agreement – table of contents:

What is a shareholders’ agreement?
Why is it so important?
When to write a shareholders’ agreement?
What to include in a shareholders’ agreement?
Can you change a shareholders’ agreement?
Obstacles

What is a shareholders’ agreement?

A shareholders’ agreement (SHA) also known as stockholders’ agreement is a formal written contract between the co-founders of a company. Such an agreement is designed to regulate the relationship between shareholders, their rights and obligations. It also defines the key issues of running a startup, creating a common vision of the founders for the long-term development of their company.

Such a document can be seen as a foundation on which internal relations in the organization are established. Lawyers around the world, and especially in the US market, recommend preparing a stockholders’ agreement to formalize important issues related to the operation of the company.

Why is it so important?

Why, in fact, is a shareholders’ agreement so important? Any company in its early stages of development has its ups and downs. The functioning of such an organization resembles a bit of a rollercoaster with its highs and lows. The SHA increases safety during such a ride. It lets you be more efficient and solve problems more easily.

The stockholders’ agreement clearly defines the relationship among the shareholders. Without such an agreement, it is difficult to react quickly and effectively to various events such as the withdrawal of one of the company’s founders, the search for a new partner, the emergence of disagreements between shareholders, etc.

When to write a shareholders’ agreement?

Since the agreement between shareholders is so important, it is sensible to ask when such a document should be signed. In fact, it is not worth waiting until the startup enters the mature stage. It is best to write the SHA as soon as your startup is launched, or while it is still in the seed phase.

This will ensure that each person’s roles, privileges and responsibilities are precisely defined. The earlier such an agreement is signed, the better. This, of course, does not mean that a shareholders’ agreement cannot be concluded at a later stage. However, it is more advantageous to regulate various issues from the very beginning.

What to include in a shareholders’ agreement?

A stockholders’ agreement can cover various issues, depending on the type of a startup and its needs. Typically, such a document can be divided into five types of clauses. The first concerns general issues such as the purpose of the document and the duration of the agreement. Operative clauses should also appear in the SHA.

This is where the legal structure of the company, contributed capital, and shareholders’ rights and obligations are defined. Such a document must also contain protective clauses such as non-compete and confidentiality agreements. At the end of the shareholders’ agreement, the so-called exit clause is usually placed. There, such issues as transfer of shares, change of shareholders, future investments are regulated.

Can you change a shareholders’ agreement?

The situation of a startup changes as it grows, and so does the shareholders’ situation. The new reality often requires signing a new SHA. Can it really be changed? Yes, it can, but it is not always easy. Changing the shareholders’ agreement requires the consent of all shareholders. Here, a majority is not enough. It often requires lengthy negotiations, a lot of skill and patience.

Obstacles

Signing an agreement between shareholders is highly beneficial, but it can still generate problems that need to be solved while the document is being drafted. First of all, the more shareholders there are in your startup, the greater the problem of reaching an agreement.

Any disputes between shareholders can negatively affect the company, hinder its development and make it difficult to attract new investors. However, despite these risks, it is still more profitable to sign a shareholders’ agreement than to abandon it.Signing an agreement between shareholders brings order in the company and strictly defines the competencies of the individual founders.