Why Every Startup Needs a Shareholders Agreement
A shareholders agreement is an essential document for any startup or growing business. Don’t let the name fool you—it’s far more than just a formal agreement between shareholders. A shareholders agreement outlines key mechanisms that govern the management, decision-making, and operations of your business, providing a strong foundation for long-term success.
What is a Shareholders Agreement?
A shareholders agreement governs the relationship between a company and its shareholders. It is particularly important for startups with multiple shareholders, whether from the outset or during their journey as the business grows.
Startups often undergo several stages of equity raises. Having a well-drafted shareholders agreement ensures all shareholders are clear on their rights and obligations, preventing potential conflicts and misunderstandings. While the specifics of a shareholders agreement vary depending on the business, there are several key provisions that every agreement should address.
Key Provisions in a Shareholders Agreement
1. Shareholder Contributions
A shareholders agreement should clearly outline how each shareholder will fund their shares. Contributions can include:
- Cash investments: Direct payments for share acquisition.
- Assets: Contributions of intellectual property, equipment, or other assets in exchange for shares.
The agreement may also specify how shares will be distributed. For example, shares tied to work performance might only vest once certain milestones are met, such as completing a project or fulfilling a specific employment period.
2. Management and Decision-Making
A clear decision-making framework is crucial for any shareholders agreement. The document should outline:
- Levels of decision-making: Decisions made by shareholders versus those made by directors.
- Voting mechanisms: Ordinary resolutions (typically requiring 50% approval) versus special resolutions (usually needing 75% approval).
For example, a majority shareholder may want additional voting rights to ensure swift decision-making, while minority shareholders may require safeguards against unilateral decisions. A tailored agreement can ensure the voting structure aligns with your business’s needs.
3. Dealing with Shares
The shareholders agreement should comprehensively address how shares can be issued, transferred, or disposed of. These provisions are essential for:
- Equity capital raises: Attracting investors during funding rounds.
- Ownership changes: Ensuring smooth transitions when a shareholder exits or transfers their shares.
Robust share management clauses are critical to preserving the integrity and continuity of the business.
4. Defaults and Disputes
Dispute resolution and default clauses are vital to a well-functioning shareholders agreement. These provisions should specify:
- What constitutes a default: For instance, failing to meet obligations or breaching the agreement.
- Resolution mechanisms: Mediation, arbitration, or other processes for resolving disputes.
- Outcomes for unresolved issues: Steps to take if disputes cannot be settled or defaults cannot be remedied.
A clear process for handling disputes helps minimise disruptions to the business.
Drafting Your Shareholders Agreement
A shareholders agreement is a complex document that requires significant customisation to suit the unique needs of your business. The provisions discussed here are just the foundation—your agreement should go into greater detail to provide robust protections and tailored solutions.
Why Choose Allied Legal?
At Allied Legal, we specialise in helping Australian startups draft shareholders agreements that are practical, clear, and aligned with their goals. Our approach ensures that you are protected and have the tools to grow your business successfully.
Get in Touch
If you need a shareholders agreement tailored to your business or want an existing agreement reviewed, contact us today:
📞 03 8691 3111
📧 hello@alliedlegal.com.au
