write-shareholder-agreement

Write Shareholder Agreement

Draft a shareholder agreement that protects all parties' interests, establishes clear governance rights, and prevents common disputes.

Why This Is Best Practice

Adopted by: NVCA model documents are used in 80%+ of US venture capital transactions; Gunderson Dettmer and Cooley models are industry standard for tech startups; Delaware remains the jurisdiction of choice for 60%+ of US public companies and most VC-backed startups. Impact: Companies with well-drafted shareholder agreements resolve co-founder disputes in days rather than months; absence of a shareholder agreement is cited in 30%+ of startup litigation cases. Why best: A shareholder agreement converts implicit expectations into enforceable rights — critical when relationships, valuations, and incentives change over time.

Sources: NVCA Model Legal Documents (2020); Delaware General Corporation Law §§141-160; Gunderson Dettmer term sheet guide; Feld & Mendelson "Venture Deals" 4th ed. (2019).

Steps

1. Identify all parties and their current shareholdings — list all shareholders, share classes, share counts, percentages, and any existing options or warrants. This establishes the baseline before adding restrictions.

2. Define governance and voting rights — specify: board composition and appointment rights per share class, protective provisions requiring investor approval (major company actions), and voting thresholds for key decisions.

3. Draft transfer restrictions — include: right of first refusal (ROFR) — company/investors have right to purchase before third-party transfer; co-sale rights (tag-along) — minority can sell alongside majority; lock-up periods for founders.

4. Include drag-along provisions — majority can require minority shareholders to approve and sell in a company sale. Specify the triggering threshold (typically 60–70%), price conditions, and liability caps.

5. Document anti-dilution provisions — weighted average (broad-based is market standard) or full ratchet (investor-favorable). Specify carve-outs for employee option pool expansion and strategic issuances.

6. Draft information rights — specify what financial reports (monthly/quarterly/annual) investors receive, inspection rights, and MNPI handling obligations. Standard: major investors get audited annual financials + quarterly unaudited.

7. Define founder vesting and IP assignment — include four-year vesting with one-year cliff for founders; acceleration provisions (single-trigger vs. double-trigger); IP assignment to the company for all founder-created IP.

8. Include liquidation preference — specify: 1x non-participating preferred (market standard), or participating preferred (investor-favorable); waterfall order for proceeds distribution.

9. Add standard protective clauses — representations and warranties, indemnification obligations, dispute resolution mechanism (arbitration vs. litigation; jurisdiction), and governing law (typically Delaware).

10. Define amendment and termination procedures — specify the threshold required to amend (majority, supermajority, or unanimous), which provisions are unamendable, and termination triggers (IPO, acquisition, unanimous consent).

Rules

• All parties must sign before any party relies on the agreement's terms.
• Governing law and jurisdiction must be specified; Delaware is strongly preferred for US companies.
• Amendments require written consent per the amendment procedure — oral modifications are unenforceable.
• Have counsel review the final document; this is a foundational legal document with long-term consequences.

Common Mistakes

• Omitting drag-along provisions — minority holdouts can block company sales; drag-along prevents this.
• Founder shares without vesting — unvested founder equity is standard; skipping vesting creates perverse incentives and is a red flag for investors.
• Participating preferred without cap — uncapped participating preferred can dramatically reduce founder proceeds in smaller exits; model exit scenarios.
• Missing deadlock resolution — equal voting shareholders without a tie-breaking mechanism can deadlock indefinitely; include an escalation and arbitration clause.

When NOT to Use

• When drafting a public company agreement (public companies are governed by exchange rules and SEC requirements, not private shareholder agreements).
• When the company has only one shareholder (no agreement needed until a second shareholder is added).
• When the jurisdiction is outside Delaware/US (different laws apply; seek local counsel).