What is a Startup Shareholder Agreement and Why You Should Include Them as a Founder

Founders have a lot to consider when developing their startups. One key document founders should consider incorporating is a shareholder agreement. While it may not be necessary before you begin your funding rounds, a startup shareholder agreement helps you organize and plan out details for your future startup business relationships. Having a startup shareholder agreement prepared in advance can help you attract interested investors and allow you to carefully plan out your company's future.

What is a Startup Shareholder Agreement?

A startup shareholder agreement is a contract presented to other founders and investors of a startup. The document details the roles, responsibilities, and liabilities of each partner involved in the startup, from co-founders to investors to business partners. The document can help you establish credibility and that you're taking the creation of your business seriously.

The agreement contains provisions regarding the company's operations, the decision-making process, and the issuance of shares to protect both the company and the shareholders. It ensures every person and entity involved is treated fairly and protects the rights of minority shareholders that often have limited control over the business operations.

The document outlines all shareholder rights and obligations. It details the process of how the shares of the startup are distributed and sold. It helps entrepreneurs and investors come to an agreement and common understanding of what is expected for receiving and providing from both ends. The document should also detail any conflict resolution plans to ensure any disagreements are settled fairly and without further issues.

What is the Different Between a Founder's Agreement vs. a Shareholder's Agreement

A founder's agreement and a shareholder's agreement is a very similar document and outlines many of the same key elements. The founder's agreement is a lighter version of the shareholder's agreement and only involves the founders. It can include a lot of the information included in a shareholder's agreement, but in the early stages, before investors are added to the startup, the document serves as a general guideline.

The shareholder's agreement encompasses all founders, investors, and partners that help develop the startup and have a vested interest and a percentage of equity. It clearly defines the legal agreements, responsibilities, and processes to mainly avoid conflicts and fallout and ensure the success of your startup. Often, you'll see these terms used interchangeably, but when you have big goals and intend to grow your startup, you should draft a shareholder agreement.

The Benefits of Including a Startup Shareholder Agreement

The shareholder agreement or founders' agreement can serve as a foundation for your new business to set the tone for how you interact and manage your team. While having a shareholder's agreement is not necessary, it can ensure everyone understands their position in regard to every legal and financial decision associated with your startup.

Determines Roles and Responsibilities – Having clearly laid out the roles and responsibilities of each founder and shareholder reduces confusion and allows the business to run smoothly. There is no question about certain decisions and who should be making them.

Protects Minority Shareholders – The shareholder agreement protects minority shareholders by requiring a majority or unanimous approval for any important decisions.

Provides Rules Regarding the Contract Termination {" "} – The outlining of removing shareholders, investors, or founders from the company makes the startup more flexible in terms of major management changes and avoids unnecessary litigation.

Demonstrates Stability – Shareholder agreements can demonstrate the company's stability by establishing a defined structure for the shareholders. It outlines many key details that help better manage the company from end to end.

Offers Dispute Resolution Guidelines – A shareholder's agreement can provide a path to resolution when a dispute occurs and helps all shareholders resolve conflicts fairly. Many startups' dissolutions begin with the inability to resolve an internal conflict between founders and their partners. A well-drafted conflict resolution can help you approach conflict confidently and reconcile these issues effectively.

What to Include in a Startup Shareholder Agreement
While there is no formal structure to what should be included in a startup shareholder agreement, there are templates and elements to consider. When creating this legally binding document, you want to ensure all important aspects are covered. These elements are a great starting point when creating a shareholder's agreement.

Name of Company and Founders – This one may seem obvious, but it's important to include. You want to have all the founders, co-founders, and shareholders of your company and your startup name, even if it may change later in development.

Equity Ownership – The ownership structure should detail the percentage of the company that each founder, shareholder, and co-founder owns. While the number may change as the company grows, it's essential to outline the percentage to ensure there are no disagreements or conflicts.

Roles and Responsibilities – Outline the roles and responsibilities of each of the founders and the shareholders. Determine if each member plays an active role in the management of the company. If they are active, define their responsibility based on their skills and background.

The Business Plan – Include a section in the shareholder agreement that describes the business plan and an overview of your goals for your startup.

Contributions and Capital – Every shareholder and founder likely contributed a sum of money or talent to the startup to help it grow and develop. Detail the contribution of every shareholder, whether it was cash, property, services, or anything to help contribute to the company's development. If the contribution does not have a monetary value, determine its worth and be sure to include it in the agreement.

Budgetary Decisions – You'll want to include a section on how capital and earnings are to be managed as the business grows. Determine whether one person manages the budget or if every detail should be agreed upon by the board. Think about expenses and reimbursement clauses to include to ensure every detail is covered.

Salary and Compensation – Determine the compensation and salary you are allocating to your startup founders and yourself. The compensation structure can be complex but having it all drafted out in your shareholder agreement can help keep things fair. It can also give your investors insight into how the founders and working shareholders are paid.

Equity and Vesting – Your startup's equity, distribution, and vesting terms should be decided on and determined early on in the development of your startup. List the agreement to ensure a clear idea of every shareholder's equity position and how it will be governed.

Intellectual Property (IP) assignment – Your business, once it's developed a plan or created a service or product, you now have intellectual property to manage. Determine how the IP will be used appropriately to protect your startup and ideas. It's essential to define that the IP belongs to the company, not to the shareholders, employees, etc.

Decision-Making and Approval Rights - The decision-making process for any vital startup impacting decision can be one of the most important aspects to include in a shareholders agreement. Determine who is allowed a vote in decisions and the weight of each vote.

The Departure of Founders or Shareholders{" "} – If anything happens where a founder or shareholder has to exit the startup, there should be a plan in place without to move forward with that shareholder's interests. Whether it's death, disability, or termination, you need to be prepared for the management of the exit of a shareholder. Outline a buyout or distribution process and terms in this event.

Dispute Resolution – If a disagreement occurs, what is the process of managing the conflict? There will always be a dispute and disagreements that will occur as every founder and shareholder will have their own ideas about how the startup should be managed.

Conclusion
Founders that utilize a shareholder agreement show that they have a well-planned business that is set up soundly to involve and include multiple business partners and navigate the complexities of developing a startup. Having this established can make your startup more attractive to investors and help you grow your business faster and more efficiently.

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