A Founder's Guide to Negotiating a Shareholder Agreement
What to fix before the first draft arrives, and which clauses are worth a fight
Investors negotiate shareholder agreements all the time, while for a founder it may be the first. This article sets out how to settle your priorities before a draft arrives, then works through the clauses that decide control, economics, your rights over your own shares and what happens if a founder leaves.
Reviewed by Mohamed Noureldin, Founder, Managing Partner & Senior Legal Consultant
The investor across the table may have negotiated dozens of shareholder agreements. This may be your first. Founders are passionate about the product and the vision. Investors, particularly venture capitalists, are passionate about financial returns and risk mitigation, and they do this all the time. That imbalance of experience can lead a founder to agree, without realising it, to terms that are not in their interest: overly restrictive control provisions, or unfavourable exit terms.
The shareholder agreement is one of the most important documents you will ever sign. It is the constitution of your company. It defines your rights, your control, and your relationship with your investors and partners. Negotiating it is not a legal formality. It is a business negotiation that will shape the future of the company and your role within it.
Related: Explore our legal document drafting service.
Decide what you must have before a draft arrives
The aim is not to win the negotiation by getting everything you ask for. It is a fair and balanced agreement that aligns the interests of all parties and sets the company up to succeed. That takes two things: a clear view of your own priorities, and a grasp of the clauses that matter most.
Before you see a draft, write down your must-haves and your nice-to-haves. That list is your roadmap for the negotiation. The clauses below are the ones to put on it.
Related Services: Explore our contract and agreement drafting services for practical legal support in this area.
Control: the board and the veto list
Control is often the most contentious area. Investors want to protect their investment. You need the autonomy to run the company.
Board composition is the most critical control provision. Fight to keep a board on which the founders have significant influence. A common structure has representatives from the founders, representatives from the investors, and at least one independent director.
Reserved matters, or veto rights, are the list of decisions that require special investor approval. It is reasonable for investors to have a say on major issues like selling the company, taking on significant debt, or changing the core business. Be wary of a list that is too long, or that reaches into day-to-day operational matters. Keep it to the truly fundamental issues.
Related: Explore our joint venture agreement and free zone company formation services.
Economics: vesting and who is paid first
This part of the agreement decides who gets what, and when.
Vesting. It is standard for founder shares to be subject to a vesting schedule, typically 4 years with a 1-year cliff. The schedule exists to keep you committed to the business. Negotiate for founder-friendly terms, such as accelerated vesting, under which your shares vest immediately if the company is sold.
Liquidation preference decides who is paid first when the company is sold. Investors will almost always have a 1x non-participating preference, which means they get their money back before anyone else. Be very cautious of anything beyond that. Participating preferences, or multiples such as 2x, can significantly reduce what founders and employees receive.
Related: Explore our joint venture agreement and master service agreement drafting services.
Your shares: dilution, transfers and lock-up
These clauses govern what you can do with your own shares.
Anti-dilution protection. Investors will get this. What matters is which type. A broad-based weighted average is standard and fair. Avoid the more aggressive full ratchet, which can be highly dilutive to founders.
Right of first refusal and co-sale rights. Both are standard. They give the company or the other shareholders the right to buy your shares if you want to sell, and the right to sell alongside you. Make sure these provisions are reciprocal.
Founder lock-up. It is reasonable to have a period in which founders cannot sell their shares. Make sure that period is defined and reasonable.
Related: Explore our real estate law advisory and legal contract review services.
If a founder leaves
The leaver provisions set out what happens if a founder leaves the company. The definitions are critical. A good leaver, for example someone who resigns for good reason, dies or becomes disabled, should keep their vested shares. A bad leaver, for example in cases of fraud or breach of contract, may find that the company has the right to buy back their shares at a significant discount.
Negotiate for a clear and narrow definition of bad leaver. A vague definition can be used to push a founder out.
For help with the agreement itself, see our drafting of contracts and agreements, joint venture agreement and legal contract review service pages.
Hire a lawyer who represents founders
This playbook gives you the knowledge to negotiate well. It is not a substitute for experienced legal counsel. The single best investment you can make during this process is to hire a lawyer who specialises in representing founders. The lawyers at Nour Attorneys, a result-oriented law firm, are founder advocates who understand the market standards and know what is negotiable.
Related Services: Explore our joint venture agreement service for practical legal support in this area.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice. Readers should seek professional legal advice tailored to their specific circumstances before making any decisions or taking any action based on the content of this article.
Nour Attorneys Team
Additional Resources
Explore more of our insights on related topics:
