Preparation of the Shareholders Agreement

In the entrepreneurial world, building a successful startup requires more than just a great idea and funding; a strong legal foundation is equally important. One of the cornerstones of this foundation is a shareholders agreement that promotes fairness, transparency, and collaboration among shareholders. Commonly referred to as a “Shareholders Agreement (SHA)” and translated into our legal terminology as a shareholders agreement, partnership agreement, or shareholding agreement, this document is crucial for preventing disputes among startup partners, defining roles and responsibilities, and ensuring the long-term success of the company.

Importance of Preparing a Shareholders Agreement

A shareholders agreement is not a mandatory document for startups. At the time of incorporation, a standard articles of association must be prepared and published in the trade registry. However, these articles are limited in flexibility and cannot be extensively tailored. For this reason, founders often draft a shareholders agreement to regulate their special relationships beyond the articles of association, solidify relationships with investors, and foster mutual trust among stakeholders.

Although there may be a sense of trust among parties in the early stages, written rules become essential to prevent potential conflicts and disputes as the company grows. By establishing a legal framework for the relationships among shareholders, a shareholders agreement minimizes the risk of disputes in the future. The key benefits of a shareholders agreement are as follows:

1. Prevention of Disputes: Defining critical aspects such as company management, decision-making processes, and profit distribution in advance minimizes potential future disagreements.
2. Protection of Shareholders’ Rights: The agreement aims to safeguard the rights of both majority and minority shareholders.
3. Investor Confidence: Potential investors are more likely to provide funding when they see that the company is built on a solid legal foundation.
4. Continuity of the Company: By addressing scenarios like shareholder exit, withdrawal, or the addition of new shareholders, the agreement ensures the operational stability of the startup. Institutional stability and corporate memory contribute to the company’s long-term viability and its ability to operate independently of its founders.

Essential Elements of a Shareholders Agreement

First and foremost, it should be noted that every startup is unique in terms of its sector, business model, target audience, and shareholder structure. For example, the needs of a technology-focused startup differ significantly from those of a retail-based business. Therefore, the shareholders agreement should not follow a one-size-fits-all format but should be tailored to the startup’s industry, growth goals, and the expectations of its shareholders.

For instance, while investor rights may take precedence in a fast-growing startup, preserving the relationships among shareholders might be the priority in a family-run startup. Accordingly, drafting a flexible and customized shareholders agreement tailored to the specific needs of each startup plays a critical role in preventing future disputes and ensuring the company’s sustainable growth.

However, the following key elements should generally be included:

1. Rights and Obligations of Shareholders
   The roles and responsibilities of shareholders within the company should be clearly defined. For example:
   • The amount and timing of capital contributions to the company.
   • Shareholders’ obligations to the company (e.g., active management roles, mentorship, or consultancy).
   • Meeting schedules and frequency of meetings.
2. Share Transfer and Sale
   The conditions for shareholders to transfer or sell their shares to third parties should be clearly outlined. For instance:
   • Right of First Refusal: If a shareholder wishes to sell their shares, existing shareholders have the first right to purchase them.
   • Drag-Along Rights: Majority shareholders can compel minority shareholders to participate in a sale.
   • Tag-Along Rights: Minority shareholders have the right to sell their shares under the same terms if majority shareholders sell theirs.
3. Profit Distribution Policy
   The agreement should specify how and when the company’s profits will be distributed among shareholders once profitability is achieved. This is particularly important during periods when reinvestment is necessary.
4. Management and Decision-Making Processes
   The agreement should explicitly define who will make which decisions and how. For example:
   • Appointment of board members.
   • Voting thresholds for strategic decisions (e.g., capital increases, onboarding new investors).
5. Non-Compete and Confidentiality
   Clauses should be included to prevent shareholders from acting against the company’s interests and to maintain confidentiality.
6. Exit Strategy
   The approach to potential exit scenarios, such as mergers, acquisitions, or initial public offerings (IPOs), should be addressed.

Conclusion and Evaluation

Every startup has its unique characteristics based on its sector, business model, target audience, and shareholder structure, resulting in varying needs. Preparing a shareholders agreement during or shortly after incorporation is essential to address the startup’s specific features and requirements.

A shareholders agreement is not merely a legal document but also a roadmap for the company’s success. A well-drafted agreement ensures the sustainable growth of the startup and fosters a collaborative environment among shareholders. Entrepreneurs and investors must recognize the critical importance of a shareholders agreement to minimize risks and protect the company in the long term.

By seeking legal counsel to create a high-quality shareholders agreement, startups can safeguard not only their present but also their future success.