Shareholder’s Agreement for Startups
A shareholders’ agreement is an agreement among the holders of shares in the startup corporation. There is not a “one size fits all” shareholders’ agreement, as the document should be customized to fit the needs of the corporation and its shareholders. A properly drafted shareholders’ agreement can provide direction for the possible challenges facing a growing company. A few examples are; selling of shares, new investors, founders disagree, and there is a deadlock after a vote.
A shareholders’ agreement regulates rights, obligations, and relationships between shareholders, provides for common understanding among founders and investors, regulates day-to-day operations, and formalizes processes to follow when an investor leaves the company or new investors buy-in.
Risks of not having a Shareholders’ Agreement
When companies do not have a shareholders’ agreement they are not protecting themselves from possible difficult situations that may arise. Problems could include; if a founder leaves the company, if a founder starts another similar project, if a new partner joins, if a founder is not producing, or if there is a disagreement between shareholders. A shareholders’ agreement would establish actions to take in each of these situations and many others. Therefore, not having a shareholders’ agreement would increase the legal uncertainty for the company and the shareholders.
Clauses in a Shareholders’ Agreement
Here are some of the main clauses you may find in a shareholders’ agreement. As noted earlier in this blog, each shareholder’s agreement would be modified to fit the needs of the company. The main clauses are:
A company with a solid shareholders agreement is in a better position to attract new investors and better protected from future legal complications. The shareholders’ agreement is vital for startups and could be changed and adapted to the needs of a growing company. It is important to create the shareholders’ agreement to be able to grow with the company and not restrict outside investment.
Marty Birky is a 3rd year law student at the University of Calgary's Faculty of Law. He is a student at the BLG Business Venture Clinic for the 2017/2018 year.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.