You and your co-founders get along today. Great. But what happens when you don't? What if one founder wants to exit and sell the company, but another wants to keep building? What if you disagree on the direction? What if someone stops contributing but wants to keep their shares?
A shareholders agreement is the document that addresses these scenarios. Without one, you're relying on company law defaults, which are often not what founders want. With one, you have clarity and protection.
What is a shareholders agreement?
A shareholders agreement is a contract between the shareholders (founders) of a company. It sets out rights and obligations beyond what the Companies House articles of association say. It covers things like:
Who can sell their shares and to whom. What happens if there's disagreement on major decisions. How decisions are made. What happens if a shareholder leaves or dies. How the company is valued if someone wants to exit. How disputes are resolved.
A shareholders agreement is essential for any founder-led company. Most VCs will require one before investing. And even without external investors, founders should have one to protect themselves.
Key provisions for founder protection
Vesting. Shares vest over time, usually 4 years with a 1-year cliff. This means if a founder leaves after 6 months, they only get shares for those 6 months of vesting. This protects the company and other founders from someone leaving immediately and walking away with equity.
Drag-along rights. If a majority of shareholders (often 75%) agree to sell the company, they can force minority shareholders to sell on the same terms. This prevents one shareholder from blocking a sale that everyone else wants.
Tag-along rights. If a majority of shareholders sell their shares, minority shareholders have the right to sell their shares on the same terms. This protects minorities from being left holding shares after the founders have exited.
Anti-dilution protection. If the company raises funding at a lower valuation than previously, your ownership percentage gets diluted. Anti-dilution provisions protect against this (though VCs will resist).
Redemption rights. If a shareholder leaves or dies, the company can buy back their shares at a predetermined formula. This keeps ownership within active founders.
Deadlock resolution. If founders are deadlocked on a major decision, how is it resolved? The agreement should specify a process (see below).
Information rights. Shareholders have the right to see accounts, decisions, and financial information. Specify this: monthly board papers, annual accounts, etc.
Deadlock resolution mechanisms
Deadlock happens. Two founders disagree on a major decision and can't agree. What happens? A good shareholders agreement specifies:
Russian roulette (shotgun clause). One shareholder makes an offer to buy the other's shares at a set price. The other shareholder can either accept the offer or force the first shareholder to sell at that price. This incentivizes fair pricing because if you set the price, you have to be willing to accept it. It often resolves deadlock because someone blinks before it gets to this point.
Expert determination. If there's a specific factual dispute (like valuation), a neutral expert decides. Example: "If shareholders disagree on whether to sell, an independent business valuation expert will value the company. If valuation is below £5 million, the company is offered for sale. Above, it continues."
Forced buyout. The company can force one shareholder to sell to the other at a predetermined price (often a formula based on revenue or profits). This is less common but can work if the relationship has broken down.
Majority vote on specific decisions. Some decisions require supermajority agreement (75%+), others just majority (50%+). Anything not requiring supermajority goes to vote, and the majority wins. Less ideal if you're a minority founder, but clarifies the process.
Most founder-led companies use a combination: Russian roulette for major deadlocks (e.g., should we sell?) and expert determination for factual disputes (e.g., what's the fair price?).
Managing departures
Founders leave. Sometimes it's amicable, sometimes it's not. A good shareholders agreement handles this:
Good leaver vs. bad leaver. If a founder leaves to pursue other opportunities (good leaver), they might get their vested shares at fair market value. If they leave to join a competitor or are fired for cause (bad leaver), they might get only what they've vested at a discount. This incentivizes staying.
Notice and transition. If a founder leaves, what's the notice period? Can they still consult during transition? Can they take clients or employees? Specify this to avoid disputes.
Death and disability. If a founder dies or becomes disabled, what happens to their shares? Usually, the company has the right (and sometimes obligation) to buy them back at a predetermined price. This protects the family and the remaining founders.
Valuation methods for share buyback
When someone leaves or there's a deadlock, you need a way to value shares. Common methods:
Formula-based. "Shares are valued at 2x trailing 12-month revenue." Simple and automatic. Can be unfair if the company's profitability or prospects have changed.
Fair market value. "Shares are valued at fair market value as determined by mutual agreement or expert valuation." More flexible but can lead to disputes.
Book value. "Shares are valued at net assets per share from the most recent audited accounts." Simple but can be outdated.
Discounted valuation for departures. "Good leavers get fair market value. Bad leavers get 50% of fair market value." Incentivizes cooperation.
Most startup founder agreements use a formula for simplicity, with a cap that says if the formula values the company above a certain threshold, fair market value applies instead.
Board composition and voting
Board representation. Does each founder get a board seat? Only founders with significant stakes? The first funder gets a board seat? Specify this to avoid future arguments about governance.
Board decisions vs. shareholder decisions. Some decisions (hiring, budget, strategy) are made by the board. Others (major sales, capital raises, share issuance) require shareholder approval. Be clear on which is which.
Veto rights. Can a single founder veto major decisions? Usually no (that's why you have deadlock resolution). But sometimes minority founders get veto rights on specific things (e.g., raising more than 2x funding, selling the company below a certain price). These are negotiated depending on dynamics.
What to include in your shareholders agreement
At minimum, a founder shareholders agreement should include:
Share classes and voting rights. Vesting schedules and repurchase rights. Drag-along and tag-along rights. Deadlock resolution mechanism. Decision rights and supermajority votes. Board composition. Confidentiality and non-solicitation clauses for founders. Process for future capital raises and dilution. Process for exit or sale. Amendment procedures.
It should be tailored to your specific situation: how many founders, how are shares split, what's the business stage, are you planning to raise funding?
Getting professional help
A shareholders agreement is complex and consequential. It's worth getting professional legal advice. Before you sign, use QuickLegalCheck to review the draft and understand the key protections and risks.
Or upload your agreement to get a detailed analysis of founder protections and any red flags.