Shareholders’ Agreement: An Investment in Company Development

When two or more people establish a joint company, the beginning is almost always harmonious. Everyone believes in the idea, roles seem self-evident, and discussing money and power feels almost out of place amidst the wave of enthusiasm. However, it is precisely at this moment that the foundations for future conflicts are laid. Nuances emerge later: when one partner invests more time than the other, when the first profits arise and a decision must be made whether to distribute or reinvest them, or when someone wishes to add a new investor or exit entirely. And then comes the moment to look at what you had agreed upon in writing. If there is nothing there, an expensive and painful improvisation begins. Especially if your votes are split 50/50 in decision-making.

Numbers That Make You Think

Statistics confirm this: Harvard Business School professor Noam Wasserman, after studying over 10,000 companies, concluded that approximately 65% of high-potential startups fail not due to a bad idea or market, but due to conflicts between co-founders. In other words, businesses are most often killed not by competitors, but by the partners themselves. This is further supported by CB Insights’ analysis of startup failure causes: approximately 23% of cases are due to an incorrect or inconsistent team, including disagreements among co-founders. Conflict is rarely about what has already happened, as it is almost always about what was not clearly agreed upon beforehand.

Legal Solution: Shareholders’ Agreement (SHA)

No legal document can resolve disagreements over partners’ values or goals, but if we are talking more about legal disputes, then the solution is simple and surprisingly inexpensive compared to the cost of a dispute: a shareholders’ agreement (in joint-stock companies: a shareholders’ agreement), internationally known as a shareholders’ agreement or SHA. It is a private contract between owners that supplements the articles of association and regulates what the articles do not cover or cover only generally. Unlike articles of association, which are publicly available, an SHA remains confidential, allowing for detailed agreements on sensitive issues. Its main value lies in the process itself: the agreement forces partners to discuss complex scenarios now, while relations are good, rather than when conflict has already begun.

What Should a Shareholders’ Agreement Include?

Firstly, the decision-making procedure, specifically which matters require unanimity or a qualified majority, and who has veto rights, so that a minority shareholder is not left unprotected. Secondly, the division of roles and contributions: who is responsible for what, whether a partner works full-time, and what happens if they lose interest or time. Thirdly – vesting of shares over time: ownership of a share gradually solidifies over a specified period, so that a partner who leaves after a few months does not retain a large portion of the company, or a partner on a “probationary period” can acquire the agreed-upon share after proving themselves. Fourthly, share transfer provisions: pre-emptive rights for other owners, tag-along (minority rights to join a sale) and drag-along (majority rights to demand a joint sale). Fifthly, profit distribution and dividend policy. Sixthly, non-compete and confidentiality clauses, as well as the transfer of intellectual property to the company – to ensure that the most significant asset belongs to the company, not to one partner personally. And finally, a dispute and deadlock resolution mechanism, which is especially important in 50/50 companies where neither party can outvote the other. It is also worth considering “good leaver / bad leaver” provisions, which stipulate a different price for a share depending on how a partner exits — honorably or in breach of agreement. And most importantly – review the agreement with every significant change: a new partner, investor, or new business direction is the right time to revisit the document.

Foundations to Lay in Advance

A shareholders’ agreement is not a sign of distrust towards a partner; on the contrary, it is a mechanism that mature partners use to protect both their relationship and the business. It is best drafted at the beginning of a shared journey, while everyone thinks alike and no one yet has a personal interest in a specific outcome. If your company does not yet have one, now is the right time to create it, before nuances turn into conflicts.

Make informed decisions!