Startup Law

11 issues to consider when preparing a shareholders agreement

During the inception stage of a startup’s life, what each founder is going to contribute will seem clear.  Without a shareholders agreement, that clarity can be lost.

As Hitch Advisory’s Nick Hitchens points out, founders generally enter a startup thinking that they know what they are going to contribute. Startups are a messy business and that can quickly change.

That’s why Shareholders agreements are such important documents. Here are 11 points you should consider when preparing a shareholders agreement, according to Gadens partner and startup law expert Richard Partridge.

1. Pre-emptive rights

The ability for existing shareholders to have priority over any third party in relation to fundraising activities and any proposed sale of shares.

2. Voting thresholds and reserved matters

What level of approval is required by the board and/or shareholders for matters voted on and what matters (above that prescribed by law) are reserved for shareholder approval.

3. Composition of the board and nominee representatives

4. Future fundraising activities

5. Transfer of shares - process and procedure

6. Dividend policies

7. Preparation of accounts

8. Drag and Tag along rights

The ability to force a minority shareholder to sell and/or the ability for a minority shareholder to participate in the sale of shares by a majority shareholder.

9. Matters which may trigger a compulsory exit by a shareholder and how much such interest is valued 

For example, shareholder default or death or disability of a key associated individual.

10. Restrictive covenants

Do you seek to restrict a shareholder from having an interest in a competing business?

11. The establishment of business plans and budgets.

There is a host of online providers who provide templated shareholders agreements for free, in order to support the Australian startup community.

However, Partridge suggests it’s best to seek the advice of a lawyer rather than relying on template documents and Hitchens agrees.

“If you understand it, get it off the shelf. Download it from a document provider. But if you don’t understand it, don’t touch it,” he says.