Shareholder’s Agreement for Startups

Shareholder’s Agreement for Startups
Overview
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:

• Shareholders rights and obligations clauses: these clauses establish the decision making process, how the shareholders’ meeting will take place, how the vote operates, and the compensation of founders.
• Protection clauses include: founders’ commitments, vesting conditions, non-compete clauses, and non disclosure agreements.
• Exit clauses: would regulate the terms of a future investment in the company or possible exit, drag and tag along clauses, and buy out.
• Operational and organizational clauses: regulates the legal structure of the company, appointment of directors and their limitations, and the shareholders’ contributions.

Common Mistakes in Shareholders’ agreements

• Allowing transfer of shares without restriction and without consent of the company.  This puts the company at risk of having shareholders who do not share the same ideas or direction of the current shareholders.  Without restricting the transfer of shares, a corporation is at risk of losing control to a new investor.
• Placing too many restrictions on shares can also be a mistake.  As discussed earlier, a shareholders’ agreement should make the company enticing to new investors.  New investors can be scared off.  One of the ways to prevent this is an anti-dilution clause, as investors do not want their stock in a company to get diluted.

Final Comments
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.