Startup founders frequently set their course for the stars. With
sweeping vision, high spirits and grand plans, what could go wrong?
Unfortunately, plenty. Building a successful company requires a
solid foundation and advance planning to navigate key challenges. A
properly drafted shareholders' agreement can be a roadmap
through the foreseeable and unforeseeable twists and turns
associated with growing a new business (e.g. bringing on new
investors, selling shares, and even unlikely scenarios such as the
sudden death or disability of a founder or key shareholder).
Snapchat's large and very public co-founder dispute
illustrates the point. Snapchat's co-founders were sued by a
former colleague claiming an ownership interest in the billion
dollar company. While the dispute has apparently been settled,
ambiguity over ownership is undesirable for an emerging company
seeking to raise capital and grow.
Accordingly, although it may not be the most romantic way to set
out on a business venture, founders should make sure they have a
professionally-drafted shareholders' agreement in place as
early as possible. Here are a few common scenarios that demonstrate
1. Our business is starting to gain traction and our
valuation is increasing. Now my co-founder wants to sell out to an
investor, and I don't.
Shareholders' agreements can restrict shareholders from
selling equity to a third party. By including a first right of
refusal, one party must give the other shareholders in the business
the opportunity to buy out the person who wishes to sell.
2. I've changed my mind and decided that I would
like to sell the company after all. I found a reasonable buyer, but
some of the other shareholders do not want to sell. The buyer is
only interested in the company if they can have 100%
Shareholders' agreements can prevent such stalemates by
including a drag-along clause. As its name suggests, a drag-along
clause will allow major shareholders to force minor shareholders to
sell their shares in specific circumstances where the major
shareholders are in agreement (i.e. "drag them" along).
This clause typically requires that all shareholders receive an
equal purchase price and a valuation method for the shares in case
of dispute, so that all the shareholders receive equal and fair
value for their shares.
3. I've come up with a realistic business plan
and found potential investors, but they will only invest if they
can sit on the board of directors. I need the investment, but I
don't want to lose control over my own
Clauses can be drafted so that certain important decisions, such
as issuing shares, require unanimous shareholder approval and
certain other day-to-day decisions, such as a threshold of capital
expenditures, require majority shareholder approval. That way,
investors can sit on the board and participate in corporate
governance, without necessarily taking control.
4. My partner decides that he/she no longer wants to
be a part of the company. What happens if he/she
Unless an agreement provides otherwise, a partner who leaves
will retain his/her shares and enjoy the fruits of ownership
whether or not he/she adds value to the company. Frequently, the
shareholders will agree that a departing shareholder should not be
able to keep the full value of his/her shares if they are no longer
contributing to the company. A shareholders' agreement can be
drafted to include provisions that induce or restrict a shareholder
from transferring his/her shares without other shareholder
approval. It can also create a first right of refusal for existing
shareholders and provide for inactive shareholders.
5. My co-founder and I had a disagreement. He/she
left the company but has intimate knowledge of the product and/or
operations of the company and I'm afraid he/she may set up a
company in direct competition.
A shareholders' agreement can include non-competition,
non-solicitation and confidentiality clauses that prevent an
individual from setting up a competing business within a set time
period in a set area, restrict a former founder from poaching staff
and customers and restrict the publication or transfer of
confidential company information.
Make no mistake – it is easy to undervalue the benefit of
an appropriate and responsible process when you are starting your
business. In many cases, not doing so at the outset can land you in
an expensive or possibly unredeemable imbroglio later down the
* Andreea Andrei was a summer student with Aird & Berlis
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).