Should we have a Shareholder Agreement?

Takeaway: The vast majority of traditional venture capital-seeking startups do not have stockholder agreements amongst the founders. When startups raise money from VCs, they will enter into a variety of agreements setting up investor rights and structures to protect the company. Before that time, founders typically rely on their relationship to hold them together and work out differences.

A stockholder agreement is a legal document that outlines the rights, responsibilities, and expectations of stockholders in a company. Stockholder agreements can sometimes be an important tool for startups that want to ensure smooth operations and avoid conflicts among stockholders. However, they are not very common in the startup community in part because when a company raises institutional money, they will enter into agreements providing for many of the same matters that a stockholder agreement would address and the investors will likely require that the stockholder agreement be terminated.

For those startups that have unique situations or simply feel that a stockholder agreement would be beneficial, here are some of the top reasons why startups consider having a stockholder agreement.

Clarify Ownership and Control

A stockholder agreement can define the ownership and control structure of the company, including the rights and responsibilities of stockholders, including the process for electing directors. This can help prevent disputes down the road and ensure that everyone is on the same page.

Protect Minority Stockholders

Minority stockholders may be at a disadvantage in a startup, especially if they have less control or influence than majority stockholders. A stockholder agreement can provide protections for minority stockholders, such as requiring a supermajority vote for certain decisions or limiting the ability of majority stockholders to dilute their ownership.

Plan for Exit Strategies

A stockholder agreement can also provide guidance on exit strategies for stockholders, such as the process for selling shares (e.g., a drag-along right) and the distribution of proceeds from a sale or merger.

Address Disputes

Even in the best of circumstances, disputes can arise among stockholders in a startup. A stockholder agreement can include provisions for dispute resolution, such as mediation or arbitration, which can help avoid costly and time-consuming litigation.

Conclusion

While a stockholder agreement is not required by law and not very common in startups, it can be a valuable tool for certain startups that want to ensure smooth operations, avoid conflicts, and plan for the future. It's important for startups to work with a qualified attorney to draft a stockholder agreement that is tailored to their specific needs and circumstances. For some startups, investing in a stockholder agreement helps build a strong foundation for long-term success.