Should we have a Shareholder Agreement?
Takeaway: While not legally required, a Shareholder Agreement can be a powerful tool for aligning a small group of founders on critical governance issues, but its function is often replaced by more standard venture financing documents as the company grows.
Your startup's governance is primarily defined by two documents: the Certificate of Incorporation (the public charter) and the Bylaws (the internal rulebook). However, founders sometimes choose to create a third, more specific document to govern their relationship with each other: a Shareholder Agreement.
A Shareholder Agreement is a private contract signed by some or all of the company's stockholders. It is designed to supplement the Bylaws with a set of specific agreements on how the stockholders will vote their shares and handle the transfer of their stock.
What Does a Shareholder Agreement Typically Cover?
Voting Agreements: The most common feature is a "vote-to-agree" provision. The founders can contractually agree in advance to vote all of their shares together as a single block on certain matters, most notably the election of the board of directors. This is a powerful tool for ensuring the founding team can maintain control of the board in the company's early days.
Enhanced Transfer Restrictions: While your Bylaws will contain a standard Right of First Refusal (ROFR), a Shareholder Agreement can add more stringent restrictions. This can include a Right of Co-Sale (or "Tag-Along" right), which allows minority shareholders to participate in a founder's sale of stock, or a Drag-Along Provision, which allows a majority of shareholders to force the minority to sell their shares in an acquisition.
Deadlock Provisions: The agreement can include a mechanism for resolving a deadlock if the founders have a fundamental disagreement, such as requiring mediation or a formal buy-sell process.
Why Are They Uncommon for Venture-Backed Startups?
While these provisions are valuable, most venture-backed startups do not have a separate Shareholder Agreement. The reason is simple: all of these key governance terms are almost always covered in the comprehensive set of legal documents that are signed as part of a priced equity financing (e.g., a Series A).
When you raise a Series A, you will sign a "Voting Agreement," a "Right of First Refusal and Co-Sale Agreement," and an "Investors' Rights Agreement." These venture financing documents are, in effect, a new and much more detailed shareholder agreement that supersedes any informal agreement the founders had previously.
The Best Use Case
The best use case for a standalone Shareholder Agreement is for a bootstrapped company that is not planning to raise venture capital in the near term. In this scenario, where there is a small, stable group of founders, a Shareholder Agreement can be a valuable tool for formally documenting their governance relationship and creating a clear set of rules for how they will manage the company together.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.