“42% of British marriages end in divorce.” My guess is that most of these couples probably hadn’t planned for this to happen when they decided to get married…

Often, when discussing documentation such as shareholder agreements and company articles with cofounders, shareholders, or directors of startups and scaleups, I am told that everyone gets along fantastically or that everyone simply falls asleep.

However, my own experience, as well as countless conversations with lawyers, suggests that things quite often do not work out between parties in the commercial world.

So, whether you have been "best friends since school" or have "known each other since we were 5," relationships can experience monumental (and sometimes catastrophic) breakdowns at work.

What is a shareholder agreement?

A shareholder agreement is a comprehensive legal document that outlines the rights, responsibilities, and relationships among shareholders of a startup.

The agreement usually covers topics such as ownership percentages, decision-making processes, transfer of shares, dispute resolution, and the roles of shareholders in company management. This agreement aims to prevent conflicts and provides a framework for addressing various situations that may arise during the startup's lifecycle.

Why do you need a shareholder agreement?

Running a business is stressful. Things quite often don’t work out as planned, and relationships can become incredibly strained. This is where some well-thought-through documentation can be hugely beneficial to all.

Think of a shareholder agreement as a prenup. Hopefully, you’ll never need to refer to it because your business relationships have gone downhill, but if you do, then you’ll be very glad that it already exists.

Founders, If you're very early stage and haven't yet fully worked through your shareholder agreement in full, then it's still a good idea to have a clear and legally binding agreement in place between the founders.

What is a founder's agreement?

A founder's agreement outlines the rights, responsibilities, and expectations of each founder and, if well-structured, can help to prevent misunderstandings and conflicts down the road.

What should be included in a founder's agreement?

Here are a few key elements that you might want to think about including in a founder's agreement: (note that I'm not a lawyer, so use these as guidelines only!)

Ownership:

The ownership structure of the company and the percentage of ownership for each founder should be clearly outlined in the agreement. This outlines the percentage of ownership each founder has in the company. In addition to this, it is also crucial to have details on future equity distribution and vesting schedules to avoid any disputes in the future. This ensures transparency and helps everyone involved to have a clear understanding of their ownership rights and responsibilities.

Roles and Responsibilities:

It is important to provide a detailed description of the roles and responsibilities of each founder. This can include outlining what specific tasks each person will be responsible for, as well as any expectations or goals they need to fulfil.

Additionally, the agreement should establish a clear decision-making process that outlines how disputes will be resolved. This might involve setting up a voting system or requiring consensus among the group. By defining these guidelines early on, the startup can establish a solid foundation for success and avoid any potential conflicts or misunderstandings down the line.

Compensation:

The agreement should clearly state the compensation terms, including salary, bonuses, and equity, for each founder. It should also define the timing and method of compensation for each founder.

Including this will help avoid misunderstandings and conflicts down the line, and ensure that all founders are fairly compensated for their contributions to the business.

Exit provisions:

It's especially important to include specific details outlining what happens if a founder leaves the company. This includes outlining the terms for termination, resignation, and retirement.

Additionally, it is important to establish how the departing founder's equity will be handled and distributed amongst the remaining founders. By including these details in the agreement, all parties involved can have a clear understanding of the procedures to fall back on if the worst happens and what will be expected of each member of the agreement.

Non-compete and non-solicitation clauses:

The founders should be prohibited from competing with the company or soliciting its employees or customers for a certain period after leaving.

This ensures that the company's trade secrets, confidential information, and customer relationships are protected. The duration of the restriction period may vary depending on the nature of the business and the level of access the founders had to sensitive information.

Restrictive covenants can be tricky things, get it wrong and you won't be able to enforce them, your non-compete clauses are one of the big things you'll want your legal advisors to look at first.

Confidentiality and intellectual property:

In order to establish clear guidelines for the protection of a company's confidential information and intellectual property, it is recommended that the agreement between the company and its founders include a detailed clause outlining the expectations and obligations of each party.

Under this clause, each founder is required to maintain the confidentiality of the company's proprietary information and intellectual property, including any trade secrets, business plans, financial information, customer data, and any other sensitive information that may be disclosed during the course of their work.

The clause should specify that any intellectual property created by the founders during their time at the company, whether individually or as part of a team effort, will be considered the property of the company. This includes any patents, copyrights, trademarks, trade secrets, or other proprietary rights that may arise from the founders' work.

To ensure that the company has full ownership of such intellectual property, the clause should require each founder to assign all rights, title, and interest in any intellectual property to the company, and to cooperate fully in the protection and enforcement of such rights. This will help to prevent any disputes or legal issues that may arise regarding the ownership or use of the company's intellectual property.

Dispute resolution:

To ensure a smooth and harmonious relationship between founders, even in the most stressful times, it's advisable to specify a process for dispute resolution, such as mediation or arbitration.

What are the benefits of a founder's agreement?

This sort of agreement can be a much easier read than a full-blown Shareholder Agreement and contains less legalese. It ensures that expectations are aligned for all parties and partners right from the off and gives a solid grounding for all founders to move forward with confidence.

A founder's agreement can come together much more quickly than a full shareholder agreement (and with fewer legal costs) so you can get on with building your new business confident that if the worst does happen, the company and you, as a founder, are covered.

While a founder agreement is a great way to get up and running, you still need the comprehensive assurance that a full-blown shareholder agreement offers as you scale. Also, as legislation varies by jurisdiction it should really still be reviewed and tailored by a lawyer with experience in startup law to ensure that it complies with local laws and regulations.

We've already set up, is it too late for a shareholder agreement?

No, It's never too late to give clarity and assurance to your group of founders and partners. While you look into creating a full shareholder agreement, you can start with your founder's agreement to make sure you cross those t's and dot those i's as soon as possible.

If you need advice or guidance on getting your startup in tip-top shape for growth, talk to us and find out how our turnkey solution can get the expertise you need for a fixed monthly cost.

TL;DR

• Yes, you need a shareholder agreement. Even if you've known your co-founders for years.
• A shareholder agreement is a legal document that outlines the rights, responsibilities, and relationships among shareholders in a startup.
• It covers topics such as ownership percentages, decision-making processes, transfer of shares, dispute resolution, and the roles of shareholders in company management.
• A founder's agreement is quicker than a full share-holder agreement but gives assurances and clarity on key matters.
• A founders agreement outlines the rights, responsibilities, and expectations of each founder and should include ownership, roles and responsibilities, compensation, exit provisions, and non-compete and non-solicitation clauses.
• Having these agreements in place can prevent conflicts and provide a framework for addressing situations that may arise during the startup's lifecycle.

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