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As a startup-orientated law firm, we at Nordic Law have hadseveral early-stage startup clients with the recurring, oldie butgoldie, question – do we really need to have a shareholdersagreement (SHA) as we are all good friends and we all go way back?Down the line, without exception, we always advise our startupclients that they never should start a business without an SHA, letalone grow a business without it. With a well-functioning SHA, thefounders and shareholders of a startup are able to solve, evenpossibly severe, problems beforehand and at its best an SHAminimizes the pressure of the shareholders enabling theshareholders to focus only on developing the business operationsknowing that the core rules of the startup are clear, comprehensiveand predictable. In other words, the yellow brick road to successis most often paved with a well-written SHA.
The next question we also often stumble upon is why an SHA is sovital? An SHA can along with the startup's articles ofassociation be classified as the constitution of the startup. AnSHA should in minimum govern how significant decisions in a startupare done, how the shareholder structure and the roles of eachshareholder are defined, how a startup can be closed or sold in aliquidation event and how intellectual property rights essential tothe startup's business operations should be protected.Especially in the light of the fast-paced business environment ofearly- and growth-stage startups, an SHA should be considered amust-have.
In this first blog post, which was originally published as aguest blog post on ArcticStartup's webpage, we will presentcertain key issues that should always be taken into considerationwhen drafting an SHA for a startup with working shareholders. Themain focus will be on three separate topics:
- The roles of the shareholders and decision-making;
- Leaver situations and transfer of shares; and
- Redemption of shares from working shareholders.
The Roles of the Shareholders and Decision-making
In startups with many founders, one of the key aspects is thatevery shareholder is aware of his or her role in the startup. Formajority shareholders it is also essential that their status isreflected in the administering of the startup. A good SHA shouldtherefore always in a clear and understandable manner define theroles and specific tasks of the shareholders so that eachshareholder is at all times aware of what is expected of them. Thiscan, for example, be achieved with the help of the classificationof shareholders to founders, working shareholders and investors.Especially if certain shareholders are responsible for managing andrunning the daily business operations, it is essential to definethe roles of the shareholders that are not that active with thedaily operations in order to avoid the `oh-so´ traditional"free rider" problem among startups.
If and when the roles of the shareholders have been defined, thenext question that arises is the decision-making process of thestartup. In most startups we have assisted, one or two of thefounders have been the majority shareholders, whereby – priorto outside investors entering the picture – it is importantto ensure that the majority shareholders are in every situationable to make all the decisions that are necessary in order tofurther-develop the startup. In this aspect, the SHA should alwaysbe prepared carefully as it is important that the SHA enables themajority shareholders to keep control of the significantdecision-making, meaning, for example the right to nominateadditional members to the board. It is also common that the SHAcontains lists of certain key decisions, which require a qualifiedmajority (explicitly defined, normally as 2/3 of all votes) and/orwritten consent from the majority shareholders.
Another recurring question is the role of the startup itself– should it be an actual party to the SHA or not? The opinionvaries quite a lot, but in our view the startup itself should alsobe a part of the SHA as quite a few conditions of the SHA affectalso the startup itself, whereby the startup is not per se bound tothe SHA if the startup is not also an actual party to it. Anothersolution is that the startup is not an actual party to the SHA, butinstead the startup commits in writing to abide by the conditionsof the SHA that affect it. However, if you are the founder of aFinnish startup, you should always keep in mind that even thoughthe startup would be a party to the SHA, the startup cannot abideby the SHA if it would mean that the startup would not comply withthe Finnish Limited Liability Companies Act. That is also a factorthat should always be kept in mind to ensure the best outcome withthe SHA.
Leaver Situations and Transfer of Shares
As in everyday life, at some point also startups experiencecertain hiccups, which sometimes end in shareholders leaving thestartup. It is, therefore, important that the SHA contains thenecessary rules that control possible leaver situations – forexample, what would happen if one of the co-founders suddenlydecided to leave?
As a starting point, the shareholders could take advantage ofthe classic "bad leaver v. good leaver" concepts. If ashareholder leaves due to inappropriate behaviour, which wouldentitle the startup to terminate said shareholder's employmentagreement, then said shareholder would be classified as a 'badleaver'. In a 'bad leaver' situation the startup and/orthe other shareholders normally have the right to redeem the sharesof the leaver for a heavily discounted price (such as the originalsubscription price). Then again, if a shareholder is leaving basedon the mutual decision of the shareholders or the shareholder isleaving due to circ*mstances that have been beyond the parties'control, then the leaving shareholder is most often classified as a'good leaver'. It pays out to be a 'good leaver' asthe shares of the leaver are most often redeemed for a considerablyhigher price compared to the 'bad leaver' situation. In'good leaver' situation the redeeming of the shares could,for example, be based on the market value of the shares.
However, there are also other share transfer situations besidesthe above mentioned good or bad leaver situations. In the SHAshould thus in an explicit manner be defined what the correctconduct is when transferring shares of the startup. Commonconditions regarding the transfer of shares are that shareholdersmay not transfer shares without the consent of the othershareholders and that other shareholders shall always have theright of first refusal meaning that the remaining shareholdersshall always have the right to purchase the shares of the sellingshareholder. The right of first refusal and the correct conductshould in detail be defined in the SHA in order to avoid confusionamong the selling shareholder, the remaining shareholders and thethird party purchaser.
To the transfer of shares is closely connected the complete exitof the shareholders. In the SHA should be defined how the completebusiness of the company may someday be sold. In that instance, thecommon clauses concern drag-along and tag-along rights. Thedrag-along right becomes applicable when and if the majorityshareholders wish to sell their shares and they receive a seriousoffer. If the majority of the shareholders want to sell, the restof the shareholders have to join and cannot object to it. Thetag-along right, however, is in place to protect the minorityshareholders, including often investors, and it is useful when themajority of the shareholders have decided to sell their shares. Iffor example, a certain minority investor has originally invested inthe startup because of the original founders, the tag-along rightallows the investor to sell his or her shares at the same time asthe original founders are selling.
Redemption of Shares from Working Shareholders
As mentioned above, in a well-functioning SHA the roles of allshareholders should in a clear manner be defined, whereby certainkey employees, who often also are minority shareholders, wouldnormally be defined as working shareholders.
The startup and/or the other shareholders should always have aright to redeem the shares of a working shareholder when theservice or employment agreement of the working shareholder has beenterminated – exemplified, the employment agreement of coder,and working shareholder, Adam is terminated and thanks to awell-written SHA, the startup has got the right to redeemAdam's shares.
However, an unconditional rule that would always require theleaving working shareholder to give up all of his or her sharescould in some situations be argued as unreasonable, whereby we cometo the mysterious world of vesting clauses. Simplified, withvesting is meant that each shareholder gets his or her full packageof shares at once, but the startup and/or the other shareholdershave the right to purchase a percentage of the shareholder'sequity in case he or she walks away before all shares have vested– in other words, been earned. In a nutshell, vesting clausesprotect especially the startup as all shareholders can rest assuredthat everybody in the team is working towards a common goal –the building of a successful and thriving startup.
The right of redemption normally lapse upon the workingshareholder's shares becoming vested within the time frame setin the SHA. Standard vesting clauses typically last four years andhave a one year 'cliff' meaning that if a shareholder boundto the vesting clause would leave the startup before the first yearis complete, said shareholder would be obliged to sell all sharesto the startup and/or the other shareholders.
However, after four years the shareholder would be able to keep allof his or her shares even though the shareholder would leave thestartup.
Final Thoughts
Above has been presented certain key topics regarding astartup's SHA that hopefully have given a bit clearer view ofthe dos and don'ts. One thing that should always be kept inmind is that a well-written SHA takes away a lot of unneeded stressfrom the shareholders, which has got a direct positive impact onthe startup itself. As the modified saying goes – happyshareholder, happy life.
Finally, as you may have guessed, there are other additionaltopics that are also very important to notice regarding an SHA,such as the protection of intellectual property rights andconditions relating to confidentiality, non-competition andnon-solicitation, which can all be characterised as essential. Thisand much more will therefore be the topic in the next part of thisblog series, so stay tuned for more!
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
FAQs
A Shareholders Agreement is an agreement between those owners. These agreements typically contain various clauses that deal with the management of the company, dispute resolution between shareholders, disposition/transfer of shares, and valuation of shares.
Can I write my own shareholders agreement? ›
We believe that it is quite possible to draw it yourself, provided that you use a good template as a basis (such as our own). The difficulty in drawing an agreement is not the legal wording but in considering the issues that the shareholders will face, and deciding what should happen in each scenario.
How do you share shares in a startup? ›
Issuing Shares
- Determine the Number of Shares and the Share Price. ...
- Determine What Approvals Are Required. ...
- Prepare the Relevant Offer Document. ...
- Receive All Signed Documents and Payment. ...
- Issue the Share Certificate and Complete the Required Updates.
Startup investors typically hold Preferred Stock/Equity, whereas founders generally hold Common Stock/Equity. Employees often hold options that grant them the right to purchase shares of Common Stock/Equity, subject to vesting schedules.
Do all shareholders have to agree to a shareholders agreement? ›
Shareholders' agreements are optional. They're not regulated by law. Most companies don't have them, and yet they're a vital part of many transactions. In the companies that have them, no person or entity can become a shareholder without agreeing to conditions set out in the shareholders' agreement.
Who writes a shareholder agreement? ›
Shareholders can create a shareholders agreement at any time. Usually, all that is needed is one or two meetings with the company's solicitors to discuss what is needed. The shareholders agreement can then be drafted.
Is a shareholder agreement legally binding? ›
A shareholders' agreement is a legally binding contract among the shareholders of a company that sets out their rights and obligations, maps out how the company should be managed, establishes share ownership, and share transfer rules – all in order to provide clear solutions to contentious scenarios that may arise in ...
Is a shareholders agreement necessary? ›
There is no law requiring a shareholder agreement when incorporating a company at Companies House but you do need constitutional documents – Articles of Association. Off the shelf Articles can be used. However, these basic off the shelf articles and the Model Articles, rarely include everything you may need.
What does a shareholders agreement look like? ›
A shareholders' agreement includes a date; often the number of shares issued; a capitalization table that outlines shareholders and their percentage ownership; any restrictions on transferring shares; pre-emptive rights for current shareholders to purchase shares to maintain ownership percentages (for example, in the ...
How much equity does a technical co founder get? ›
How much equity should a technical co-founder get? The share depends on their qualification and contribution. For example, in software startups where the tech part plays a huge role, a tech co-founder may request ~50% equity.
The basic formula is simple: if your company needs to raise $100,000, and investors believe the company is worth $2 million, you will have to give the investors 5% of the company. The remainder of the investor category of equity can be reserved for future investors.
How much equity should you get at a startup? ›
As a rule of thumb, a non-founder CEO joining an early-stage startup (that has been running less than a year) would receive 7-10% equity. Other C-level execs would receive 1-5% equity that vests over time (usually 4 years).
How many shares should a startup have? ›
The commonly accepted standard for new companies is 10 million shares. When you build a venture-backed startup designed to scale, you will need to issue shares to an increasing number of employees. Authorizing 10 million shares means it will be unlikely you'd ever need to offer someone a fraction of a share.
Can I sell my startup shares? ›
If you're an individual investor you cannot buy shares of private stock, but you can sell them. In most cases, the easiest option is to sell your shares of stock back to the company that issued them. Otherwise, you can find a broker who will help you find a buyer and conduct this transaction.
What happens if there is no shareholders agreement? ›
What happens with no shareholders' agreement? With no shareholders' agreement, both the company as a whole and individual shareholders could be exposed to unresolvable future conflict. Without an agreement to clarify the legal standpoint of each party, if a dispute occurs, a deadlock situation could occur.
Are new shareholders bound by shareholder agreement? ›
New shareholders are not automatically bound by a Shareholders Agreement. Therefore, the existing shareholders will need to amend the Shareholders Agreement to include any new parties. Shareholders Agreements are governed by contract law like other contracts made between private parties.
Do shareholders own the companies they hold shares in? ›
In legal terms, shareholders don't own the corporation (they own securities that give them a less-than-well-defined claim on its earnings). In law and practice, they don't have final say over most big corporate decisions (boards of directors do).
What happens if a shareholder wants to leave? ›
Share transfer agreements come into play when a shareholder wants to leave the company. It will set out whether any of the remaining shareholders can buy the shares or whether they will go directly to the company. It also contains the value of the shares and the ownership interest.
Why is a shareholders agreement important? ›
The agreement can document key decisions of the company such as how shares can be sold, what happens if a shareholder dies, whether shareholders can work in competition with the company when they leave and whether any compulsory share transfers should take place if a shareholder has acted in contravention of the ...
Can shareholders be forced to sell shares? ›
Can a Shareholder Be Forced to Sell Shares? Absent breach of a contract or the law, a shareholder can't typically force another shareholder to sell. But a shareholder can seek to enforce the terms of a buy-sell agreement, a shareholder agreement, or another valid contract.
A shareholders' agreement is a private contract and regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. It may also govern the way in which the company is run. Why do you need one?
How do you dissolve a shareholder agreement? ›
If you want to remove a shareholder, you first must decide if the shareholder is leaving the company voluntarily or involuntarily. For involuntary removals, the shareholder will usually need to have violated the shareholders agreement or company bylaws before they can be forced out of the company.
How do you draft a shareholders agreement? ›
- What to Think about When You Begin Writing a Shareholder Agreement. ...
- Name Your Shareholders. ...
- Specify the Responsibilities of Shareholders. ...
- The Voting Rights of Your Shareholders. ...
- Decisions Your Corporation Might Face. ...
- Changing the Original Shareholder Agreement. ...
- Determine How Stock can be Sold or Transferred.
The Shareholders Agreement is the best form of legal protection for a minority shareholder. By incorporating certain express contractual provisions in the Shareholders Agreement, the minority shareholder can be protected by contractual rights beyond those afforded by statute and corporate law.
Does co-founder get salary? ›
Co Founder salary in India ranges between ₹ 4.0 Lakhs to ₹ 55.5 Lakhs with an average annual salary of ₹ 15.0 Lakhs. Salary estimates are based on 635 salaries received from Co Founders.
How do you split equity between co founders? ›
Splitting equity among co-founders fairly
- Rule 1: Aim to split as equally and fairly as possible;
- Rule 2: Don't take on more than 2 co-founders;
- Rule 3: Your co-founders should complement your competencies, not copy them;
- Rule 4: Use vesting. ...
- Rule 5: Keep 10% of the company for the most important employees;
Founders: 20 to 30 percent divided among co-founders. The company contribution is rarely exactly 50/50 and the equity split should be based on a variety of factors, including those discussed above. Angel Investors: 20 to 30 percent. Venture Capital Providers: 30 to 40 percent.
What does a 20% stake in a company mean? ›
20% Shareholder means a Shareholder whose Aggregate Ownership of Shares (as determined on a Common Equivalents basis) divided by the Aggregate Ownership of Shares (as determined on a Common Equivalents basis) by all Shareholders is 20% or more.
How much equity should a CEO get in a startup? ›
Startup financial advisor David Ehrenberg suggests that 5 to 10 percent is a fair equity stake for CEOs who join the company later. Research by SaaStr backs up this suggestion. The average founder/CEO holds roughly 14 percent equity at the company's IPO, while an outside CEO holds an average of 6 to 8 percent.
How do you negotiate equity in a startup? ›
How to negotiate equity in 9 steps
- Research the company. ...
- Review the company's financial potential. ...
- Research similar companies. ...
- Read the offer carefully. ...
- Evaluate the terms of the offer. ...
- Address your needs and the company's needs. ...
- Speak with the employer during negotiations. ...
- Keep your negotiations focused.
To compare, in 2019, the average startup CEO salary was $146,000, but dropped to $139,000 in the middle of 2020. The same trend was true for the median startup CEO salary. In 2019, it was $131,000 and in 2020, salaries ranged around $130,000. SaaS was the top performing industry by CEO salary in 2020.
How do startups negotiate salary? ›
How to Negotiate Your Startup Offer
- Know your minimum number. Leverage sites like PayScale and Glassdoor to learn to learn what employers in your city are paying for similar roles and industries. ...
- Provide a salary range. ...
- Consider the whole package — not just salary. ...
- Ensure your pay increases with funding.
At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. That means you and all your current and future colleagues will receive equity out of this pool.
What are the important contents and objectives of the shareholders agreement? ›
There are basic components that every shareholder's agreement contains. Examples include the number of shares issued, the issuance date, and the percentage of ownership of shareholders. Shareholders' agreements often determine the selling and transferring of shares to third parties.
What is shareholders agreement under companies Act 2013? ›
Also known as a shareholders' agreement, is an arrangement that regulates the relationship between the shareholders, the management of the company, ownership of the shares, rights, obligations, and protection of the shareholders. It may also command the way in which the company is run.
How do you draft a shareholders agreement? ›
The appointment of directors and quorum requirements, determining the matters requiring special resolution or providing veto rights to certain shareholders, financial needs of the company, restrictions on right to transfer shares freely, defining the obligation of each of the shareholder towards the company.
Why do you need a shareholders agreement? ›
It gives the shareholders personal rights and imposes personal obligations on the shareholders. The agreement can provide protection to minority shareholders and majority shareholders, regulate the transfer of shares, impose restrictions, govern decision-making, and much more.
What should I look for in a shareholders agreement? ›
7 things an investor should look for in a shareholders agreement
- Protection against dilution. ...
- The right to appoint a director. ...
- Tag along and buy out rights. ...
- Pre-emptive rights. ...
- Protections against breach. ...
- More information.
A shareholders' agreement is a legally binding contract among the shareholders of a company that sets out their rights and obligations, maps out how the company should be managed, establishes share ownership, and share transfer rules – all in order to provide clear solutions to contentious scenarios that may arise in ...
What does a shareholder agreement look like? ›
A shareholders' agreement includes a date; often the number of shares issued; a capitalization table that outlines shareholders and their percentage ownership; any restrictions on transferring shares; pre-emptive rights for current shareholders to purchase shares to maintain ownership percentages (for example, in the ...
Generally, the shareholders enter into such agreement during the registration of the company, however when it comes to the upcoming/new investors, the existing and the new investors may enter into and execute a fresh shareholders' agreement at any time during the life of the company.
How is a shareholders agreement executed? ›
This Agreement becomes effective upon the signature by all Partners and shall be binding on each Partner as long as that Partner is the owner of the Shares or other Equity Securities. This Agreement shall, however, be terminated upon the consummation of a Trade Sale or an IPO.
Which one of the following is not a right of a shareholder? ›
Answer and Explanation: The correct option is b. To declare dividends on the common stock. The ownership rights of a stockholder includes voting to elect the board of...
Do shareholder agreements need to be registered? ›
Unlike the articles of association, which are a public document, the shareholders' agreement is a private contract between the shareholders which does not need to be filed with companies house.
Is a shareholders agreement a contract? ›
A shareholders' agreement is a private contract and regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. It may also govern the way in which the company is run. Why do you need one?
What if there is no shareholders agreement? ›
What happens with no shareholders' agreement? With no shareholders' agreement, both the company as a whole and individual shareholders could be exposed to unresolvable future conflict. Without an agreement to clarify the legal standpoint of each party, if a dispute occurs, a deadlock situation could occur.
What does it mean to own 51 of a company? ›
Someone with 51 percent ownership of company assets is considered a majority owner. Any other partner in the business is considered a minority owner because he owns less than half of the business. The rights of a 49 percent shareholder include firing a majority partner through litigation.
Can a majority shareholder change the shareholders agreement? ›
Once in place a shareholders' agreement can only be amended with the agreement of all of the shareholders whereas the company's articles of association can be changed by a 75% majority meaning that a shareholders' agreement provides better protection for minority shareholders.
What are the right of shareholders? ›
Common shareholders are granted six rights: voting power, ownership, the right to transfer ownership, dividends, the right to inspect corporate documents, and the right to sue for wrongful acts.
