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By LegalEdge News

Giving people shares? Have you got a Founder/ Shareholder Agreement?


You know the scenario… you’re a start-up and someone is helping build the tech, or someone is coming in on the marketing side to help get things moving. You can’t afford their salary/ fees so you give them shares instead (sweat equity). Or you and your co-founders have decided how you’ll work on your start up and what shares each of you will get. And that gets sorted (it’s easy!).

But you haven’t had a chance to/didn’t think about/ think you can’t afford to* get an agreement in place to regulate your relationship going forwards. And then as time goes by you forget about it or it falls down the list of priorities – you’re busy, we get it. But then it turns out someone isn’t doing what’s needed/ isn’t right for the job/ you don’t agree on the business strategy*.

* Delete as applicable

You undoubtedly will have started off with good intentions, happy and on the same page, but without an agreement in place there’s not much you can do if (when) things start to go wrong. We get so many calls where this has happened – and if there’s no agreement in place it’s VERY difficult to find a solution….

So here’s 6 key reasons why you should talk to us about getting a Founder/ Shareholder Agreement in place sooner rather than later:

  1. Disagreements – unfortunately this is really very common, so you should think about it now, rather than leave it until it’s too late. Shareholder disputes can destroy a business, so it’s key to set out a quick and efficient mechanism to deal with it. Examples range from someone (e.g. founder or non-exec) having a majority/casting vote, to getting a mediator in, to having a forced exit mechanism, often using ‘Russian roulette’, ‘Texas’ or ‘Mexican shoot out’ clauses (Google them). 
  2. Share ownership – you will want to control who owns shares, when they can sell and for how much (really you will). So at a minimum you’ll need a ‘right of first refusal’ if someone wants to sell. You can also regulate what happens to people’s shares/ options if they leave/ can’t work for you anymore (known as ‘good/bad leaver’). Should people earn shares over time or have to sell all/some if they leave within 2 or 3 years? (Vesting/reverse vesting) If so for what price? What if they haven’t performed as promised?
  3. Exit – minority shareholders will want certain protections like ‘tag along’ so they can participate in a sale of the business, and the majority shareholders will want ‘drag along’ rights so they can force the minority to sell if the majority decide to do so. Otherwise your once in a lifetime exit could be held up by that difficult person who left ages ago but still has a small %.
  4. Management of the business – most big-ish shareholders, e.g. investors, will want a say in certain big decisions, particularly if they’re not on the board. These often include any board changes, approval of/changing budgets and business plans, high level capex and opex, certain hires, etc.  
  5. Non-compete/non-solicitation – you may well want to restrict someone if they leave under a bit of a cloud from going straight to a competitor with all your knowledge and know-how, and also from taking staff, clients etc. These restrictions can be stricter than those in employment contracts. 
  6. Profit share – different shareholders might want different dividends, in which case different classes of shares are needed.  This can be useful for tax planning, also if dividends are to be tied to performance criteria.

If any of the above rings true don’t panic – we can help. Get in touch with us today and we can discuss your options.

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