Terms of shareholders’ agreements

What is a term in the context of a shareholders’ agreement?

In the context of agreements between shareholders, a term encompasses a particular subject. For example:

what will the equity split be?

Terms do not correspond directly to documents.

For example, if the founders agree to split equity 70/30, implementing this would require certain wording to appear in several different documents.

What are heads of terms / what is a term sheet?

Heads of terms and term sheet are used interchangeably. They refer to a short, non-binding document which outlines the most important terms that the founders have already agreed in principle.

I have included an example term sheet below. But before you can make sense of a term sheet, you need to know what the most important terms are.

What are the most important terms in a shareholders’ agreement?

The most important terms in a shareholders’ agreement are the ones that can directly affect the founders.

These include:

what will the equity split be?

what happens if someone who has shares leaves the company?

how will disagreements be handled and resolved?

how can a founder be protected against unfair dilution?

is it possible to get rid of someone who has shares?

Opening discussions might bring other things to light. That’s why it’s important to have these conversations as soon as possible.

How do we start discussing terms and putting together a term sheet? It’s awkward.

It can be tough. It’s best to set aside a specific session to discuss things in person. Here are a few ideas that have worked for some of my past clients:

• The future scenario. Invite each co-founder to describe a few hypothetical futures: fast growth, slow growth, someone stepping back, someone not contributing enough. Then ask each person: “what would fair treatment look like?” in each case.

• Focus on shared principles. Start by agreeing 3 to 5 principles: everyone should be treated the same, decisions should not be made without consent, the board member with the deciding vote will rotate every 3 months.

• Work on blind spots. Frame the exercise as risk management: “let’s list everything that could hurt the company or any one of us”. The same topics will come up: founders departing or being diluted, whether the company is investor ready - and what needs to be done to make it so.

• Use Robolawyer. Use Robolawyer to put together your shareholders’ agreement. The first step is to build out the term sheet, which Robolawyer helps you get done without overwhelming you. You can do this alone and lead negotiations offline, or invite your co-founders onto the platform and build them out together. Because the structure comes from a third party, it reduces personal tension and introduces topics without you or your co-founders having to explicitly raise them.

Whatever method you use, getting started is the hardest part. Remember, everyone involved wants to know things are being done right.

Term: equity splits and the cap table

What is an equity split?

The equity split refers to the percentage of a company that a person owns. For example: a company has 2 co-founders with an equity split of 50/50.

What is a cap table?

A cap table is a visualisation of the company’s ownership. It should show the details of all shares that currently exist, as well as contain details of any future shares that may be issued. Here is an example of a simple cap table for a company that has ordinary shares with a value of 1p each:

How is the cap table kept?

Cap tables are kept using spreadsheets or other software built to keep them.

One person should take responsibility for ensuring the cap table remains up to date.

The cap table should only be updated when things actually change. For example:

• where shares are actually issued to someone, or
• where a promise of equity is made to someone that you intend to fulfil.

The purpose of the cap table is to make it easy to quickly see who owns what.

Is an equity split different to the cap table?

Yes. The equity split simply describes who owns what percentage. A cap table is a visual representation of the company’s ownership. Looking at a company’s cap table will tell you what the equity split is. In the example above, reading the cap table tells me that the equity split between Natasha and Kerry is 50/50.

Why does equity split matter?

A larger percentage means more money. It also means more control, although that additional control is only under default company law.

The split also matters when it comes to making decisions. Take the above example: if decisions can only be passed by a majority, what happens if either Natasha or Kerry does not agree?

How does having more equity give someone more control?

Under default company law, decisions are made by shareholders passing resolutions. A resolution is an official decision of the shareholders, and a resolution can be either:

• an ordinary resolution, which requires a majority of the shareholders to agree in order to pass, and
• a special resolution, which requires 75% of the shareholders to agree in order to pass.

For example, this means that:

• if a shareholder holds over 50%, they can pass ordinary resolutions, or
• if two or more shareholders together hold over 50%, they too would be able to pass ordinary resolutions, or
• if 3 shareholders own 26% together, this would allow them to block the other shareholders from passing a special resolution.

Remember, this is under the default company law. Adopting a shareholders’ agreement can mitigate this level of control.

How does a shareholders’ agreement help reduce the power of holding more equity?

Shareholders’ agreements introduce an additional layer of security by requiring written consent from all (or a certain percentage of) the shareholders before certain reserved matters are carried out. For example, reserved matters include:

• issuing additional new shares (requires only an ordinary resolution; could dilute other shareholders out of existence), or
• adopting new articles (requires a special resolution; could introduce provisions that favour one shareholder).

By having a shareholders’ agreement that requires consent before a reserved matter is carried out, the threshold increases from 50% (or 75%) to 100% (or whatever other percentage of shareholders you decide need to agree).

What mistakes do founders typically make when it comes to determining the equity split?

• Defaulting to an equal split when contributions are not equal (whether contributing money or effort).
• Deciding on and implementing the split too early (before co-founders are able to truly assess each others’ contributions).
• Issuing new shares at different times without proper planning (creating unexpected and unfair dilution for existing shareholders).
• Failing to apply vesting (so that equity is given rather than earned).
• Giving too much weight to ideas (often worth what they’re written on).
• Not stress-testing scenarios like illness, underperformance, relocation or shifted life priorities.

How do we determine a fair equity split?

• Start with roles and commitments over the next 1-2 years. Quantify how long you expect things to take, who has responsibility for what and who is accountable to who. Remember that ownership should mirror forward-looking contributions and not just founder origin stories.

• Consider the risk taken by a founder. If someone has quit their job to do this full time, they’re taking a greater risk than a founder who’s doing it on Sunday mornings. 50/50 doesn’t seem right.

• Separate negotiation of percentage from negotiation of vesting. You may all agree that someone owns 30%, but only if it’s fully earned over 3 years.

• Ensure shareholders with critical capabilities are adequately incentivised. A founder with domain expertise or highly relevant previous experience building your product might justify a higher slice because substituting them would be difficult or slow.

• Have someone sanity check your decisions. A neutral third party can spot emotional bias, overconfidence or any perceived unfairness that may not be obvious to you.

Splits are fair when everyone involved can explain why the chosen split accurately reflects the contributions made and risks being taken.

When should we incorporate a company? Before or after agreeing the equity split?

Founders typically approach when to incorporate in one of two ways:

1. One founder takes responsibility for the legal stuff and incorporates a company as the single shareholder in order to grab the name.
2. The founders incorporate the company with the equity split in place from day one.

Each approach has upsides and downsides.

One founder has already incorporated. How do we fulfil the equity split?

The company will issue new shares to the other founders in the proportions required to fulfil the agreed split.

This means:

• The original founder keeps all the original shares (let’s say 100 shares of 1p each).

• If there are 2 shareholders and the agreed split is 50/50, you simply issue an equal number of shares to the other founder - a further 100 shares of 1p each.

• If there are 3 shareholders and the agreed split is 60/30/10, you work out the total number of shares needed for the original founder to end up with 60%. So:

  • 100 shares divided by 0.6 = 167 shares needed in total

  • 60% of 167 = 100 shares for founder 1 (already held)

  • 30% of 167 = 50 shares for founder 2 (to be issued)

  • 10% of 167 = 17 shares for founder 3 (to be issued)

  PEDANTIC POINT

  The maths often produces fractions (100 ÷ 0.6 = 166.666, and 40% of 167 = 66.8). Because you can’t issue a fraction of a share, you round to whole numbers — here, up — so the final cap table is as close as possible to the intended percentages. The tiny differences this creates don’t matter for most early-stage companies; they only become important if you need increased precision.

  For situations where increased precision is required, you would split each share into smaller values. So a share of 1p would become 10 shares of £0.01, or 100 shares of £0.0001. Splitting the shares this way allows percentages to be calculated cleanly without rounding.

Why issue new shares rather than transfer existing shares to fulfil an equity split?

You should not transfer shares from one founder to another. Issuing new shares is cleaner and makes it easier to follow the company’s legal history. Transfers are more complicated with significant tax consequences. They also muddy the corporate history (since selling shares is an action by the shareholder, not the company).

We have not incorporated yet. Should we do it with the initial equity split in place?

You could incorporate a company with the equity split already in place.

Imagine this: a company is incorporated with shares that have a minimum value of £0.01 each. It issues 6,000, 3,000 and 1,000 shares to each founder. There would be 10,000 shares in total; no need to worry about rounding up or down on fractions of shares.

However, once incorporated, note that default company law will apply until you override it by implementing a shareholders’ agreement. This might be fine for you, but reconsider the question above: what are the risks of not having a shareholders’ agreement?

We want to allocate shares for staff in the future. Is this relevant now?

Startups tend to allocate shares for staff by establishing share option pools. Option pools work by hypothetically increasing the number of shares that currently exist by a certain percentage (usually 10%). Doing this usually dilutes the other shareholders equally. We can visualise it like this:

Crucially, the option pool shares are not actually issued to staff until they have a value that can be converted to cash (this is typically when an exit event takes place, such as a funding round or acquisition).

So is it relevant now? Not really, as it is unlikely that you’ll be adopting a formal share option pool (a fairly complex legal task) when your primary concern is putting together a shareholders’ agreement. However, being aware of how a share option pool works is important, as even discussing a percentage to set aside for staff now provides clarity over what each shareholder’s eventual ownership might be.

What should we keep in mind when discussing how to split equity?

• There’s no single formula to determine a fair split.
• Consider actual contributions (money and effort) and risk each co-founder is taking.
• Default company law applies in the absence of a shareholders’ agreement.
• You should be able to put together a cap table that demonstrates the target equity split.

Term: vesting

What is vesting?

Vesting is a mechanism that protects the company. It is a way to claw back shares from a shareholder if they stop contributing to the business.

How does vesting work in UK companies?

The best and most common way to implement vesting in a UK company is to use reverse vesting.

The easiest way to understand how reverse vesting works is with an example:

• A new company will have 3 shareholders: Amber, Bruce and Haley.
• They agree that their shares will reverse vest over 4 years with a 1 year cliff (what’s a cliff?).
• On 1 January 2026, ordinary shares of 1p each are issued and the shareholders’ agreement takes effect.
• The cap table looks like this:

  Shareholder	Shares	Invested	Owns
  Amber	10,000	£100	33.3%
  Bruce	10,000	£100	33.3%
  Haley	10,000	£100	33.3%
  TOTAL	30,000	£300	100%

What is reverse vesting?

Reverse vesting means the shares are actually issued to the shareholders on 1 January 2026, but a proportion of them can become worthless if the shareholder leaves the company before 1 January 2030.

If it was forward vesting instead:

• no shares would be issued on the day the agreement is signed (1 January 2026),
• the first 25% of their shares (2,500) would be issued on 1 January 2027,
• the second 25% of their shares (2,500) would be issued on 1 January 2028,
• the third 25% of their shares (2,500) would be issued on 1 January 2029, and
• the final 25% of their shares (2,500) would be issued on 1 January 2030.

Why is reverse vesting better than forward vesting?

• For shareholders: they get ordinary shares up front, allowing them to vote as normal; they own something real now.
• For investors: it’s easier to see who owns what; hard to understand ownership that slowly increases over years.
• For the company: conversion to deferred shares has specific triggers; using company law share class system is a clean way to differentiate between vested and unvested shares.
• For tax reasons: the capital gains base cost is tied to the initial (low) value of the company; if shares are issued slowly over time, market value would be higher (= more tax due eventually) each time new shares are issued.
• For everyone: less paperwork and admin.

What does ‘over 4 years with a 1 year cliff’ mean?

This is the vesting schedule. It means that for the next 4 years (from 1 January 2026), each shareholder will unlock a proportion of their shares each month, which they can keep even if they leave the company. But if they leave within the first year (the cliff period), they get to keep nothing.

What does ‘unlock a proportion of their shares’ mean?

• Take the vesting period in months (4 years = 48 months) and turn it into a percentage: 1/48 * 100 = 2.0833% . This is the proportion of their shares they unlock after each full month passes.

• After 2 years, 24 months will have passed, and so: 24 * 2.0833 = 50% . This is the percentage of their shares that will be considered vested.

• After 4 years, 48 months will have passed: 48 * 2.0833 = 100% of their shares are vested.

What happens if someone leaves during the cliff period?

• On 1 July 2026, Amber leaves.

• Since this is within the 1 year cliff, all of her shares become worthless.

• Worthless shares are named deferred shares.

• They differ from ordinary shares because people who hold deferred shares can’t vote and don’t receive payments.

• We can visualise it like this:

  Shareholder	Class	Shares	Of class	Voting
  Amber	deferred	10,000	100%	0%
  Bruce	ordinary	10,000	50%	50%
  Haley	ordinary	10,000	50%	50%
  TOTAL	2 classes	30,000	-	100%

What happens if someone leaves after the cliff period?

• On 30 September 2027, Bruce leaves.

• 21 full calendar months have passed.

• 21 * 2.0833 = 43.75% of Bruce’s shares have vested; 56.25% have not.

• Applied to his shares: 4,375 have vested and 5,625 have not.

• We can visualise it like this:

  Shareholder	Class	Shares	Of class	Voting
  Amber	deferred	10,000	64%	0%
  Bruce	deferred	5,625	36%	0%
  Bruce	ordinary	4,375	30.43%	30.43%
  Haley	ordinary	10,000	69.57%	69.57%
  TOTAL	2 classes	30,000	-	100%

What happens if someone leaves after the vesting period ends?

They get to keep all of their ordinary shares and they don’t need to worry about deferred shares at all.

Does an outgoing shareholder need to consent to their ordinary shares converting to deferred shares?

If the shareholders’ agreement is put together properly, no. The agreement should be clear about:

• what triggers the conversion,
• how to calculate the number of vested shares, and
• how deferred shares are different from ordinary shares.

What can trigger the conversion of ordinary shares to deferred shares?

Something has to happen for a shareholder’s ordinary shares to become deferred. This is the trigger.

The trigger is usually tied to a shareholder’s employment with the company. For example:

• Bruce is an employee with an employment contract.
• The employment contract says he can be validly fired in certain situations.
• Bruce is validly fired under the employment contract.
• Being fired is the trigger.

If the person is not an employee (for example, a consultant) then their consultancy agreement should contain something similar.

If the person is not an employee or a consultant, the trigger is unclear.

How does vesting get triggered if there is no employment contract or consultancy agreement?

It doesn’t - unless the shareholders’ agreement says otherwise.

A well drafted shareholders’ agreement should work like this:

• if there is an employment contract or consultancy agreement in place:
  • being terminated under that is the trigger,
• but if there isn’t one:
  • failure to meet certain key performance indicators by a certain date is the trigger,
• and if for some reason the indicators or date aren’t present:
  • at least 75% of the other shareholders will together decide what the trigger is.

Should we always include key performance indicators in a shareholders’ agreement?

If you already have or will immediately put employment contracts and consultancy agreements in place with each shareholder, then including milestones in a shareholders’ agreement is unnecessary.

If not, then you should include them - otherwise vesting might not be triggered.

How do we list what each shareholders’ actual tasks and responsibilities are?

Ask yourselves, in respect of each shareholder:

What should this person be doing and how can that be evidenced?

These should help you form their milestones. For example:

• Haley is responsible for building the minimum viable product.
• Haley says she will be working on this full time.
• Haley says the MVP should be ready for first user within 6 months.
• Haley will make the code accessible to the team.
• Haley will will maintain a test deployment for the team to use.

These are concrete requirements that can be evidenced. Ask yourselves:

If Haley fails to deliver, should that trigger vesting?

This will help you put together a fair and fact based list, making it clear if milestones have been met or not.

What does conversion to deferred shares involve?

The first step is understanding that converting someone’s shares to worthless shares is a big thing. It usually happens when the relationship has broken down to the point where you can’t imagine working with them again.

The process should be outlined in the shareholders’ agreement and articles. Generally, where there are no disagreements:

1. The directors of the company will calculate the number of shares that are to be treated as unvested.
2. The unvested proportion of ordinary shares will be converted to deferred shares by:
   • updating the company’s cap table and registers to show the change, and
   • filing the appropriate forms with Companies House.

What happens to the share certificate for the original ordinary shares?

When a person becomes a shareholder, they usually receive a single certificate for all of their shares. For example: “Tia holds 1000 ordinary shares of £1 each”.

If some of those shares then become deferred, that share certificate needs to be returned and then cancelled.

A new share certificate is then issued for the updated shareholding. For example, one that says “Tia holds 500 ordinary shares of £1 each” and another that says “Tia holds 500 deferred shares of £1 each”.

If the share certificates were never sent (for whatever reason) then you don’t need to do anything other than issue the updated ones.

If the share certificate was sent, but that person now says they can’t find it, that person needs to provide an ‘indemnity for a lost share certificate’. This is a promise from that person that it’s truly lost, but if someone uses it for something naughty and the company suffers as a result, that person will take financial responsibility for putting things right.

What happens to deferred shares?

Nothing. The deferred shareholder continues to hold them indefinitely.

However, the articles should say that the deferred shareholder has no rights (such as the right to be notified of a meeting, or the right to vote at one). This means the deferred shareholder does not participate in the company’s operation at all.

Doesn’t the existence of deferred shares make my cap table messy?

Having deferred shares visible on the cap table makes it clear who left the company and when. You should not automatically consider this as messy, since it provides some important information about the company’s history.

However, it is possible to clean up the cap table by having the company purchase and cancel the deferred shares. Whether this is worth the expense at an early stage is debatable. These things usually get cleared up as part of a larger round in the future.

Why is vesting important?

• Vesting ensures that everyone has skin in the game.
• Vesting prevents people unfairly holding onto or getting hold of shares in your company.
• Vesting rewards long term commitment to your company.
• Vesting is expected by investors. If it hasn’t already started, investors will make you start it. So it’s best to start early.

What is a ‘normal’ vesting schedule?

Market standard is 4 years with a 1 year cliff, from the date they receive the shares.

Whether this is appropriate for you, and for every shareholder, is ultimately up to you to agree amongst yourselves.

It is possible to have different vesting schedules per founder, but I don’t recommend it - feelings will get hurt.

How is vesting implemented in legal documents?

This is the legal framework:

1. When a person becomes a shareholder, they agree to abide by the company’s articles.
   PEDANTIC POINT

   • The contract a person automatically enters into to abide by the articles is different to the shareholders’ agreement.
   • The automatic contract is created by section 33 of the Companies Act 2006.
   • When you implement a shareholders’ agreement, this is in addition to the section 33 contract.
   • Does this matter in real life? No.
2. The company’s articles are governed by company law. Company law makes things black or white: “was this process followed properly? No? Sorry, not valid.”
3. When an agreement between shareholders is formalised, the articles are usually replaced. The new articles make the vesting schedule legally enforceable and provide procedural guidance. The shareholders’ agreement document will contain sensitive information and rules, such as details of an individual’s vesting schedule.
4. For conversion to worthless shares to happen, something needs to trigger it. The usual trigger is resigning as a director, or the termination of an employment, consultancy agreement, or failing to meet clear milestones or key performance indicators.

Why is vesting implemented this way?

This is why vesting is implemented in the way described above:

• company law forces compliance with the articles; you need new articles,
• the articles are public, so you need a private agreement; you need a shareholders’ agreement,
• each shareholder’s responsibilities and deliverables are listed somewhere; you need employment/consultancy agreements or milestones.

Why is vesting so complicated?

It seems like a vesting schedule should be simple enough to fit on a single page, so why does it need to be sewn across 3 documents? It’s because each of these documents is governed and enforced slightly differently:

• The shareholders’ agreement is a private agreement that is governed by contract law. If someone breaches a contract, another person needs to sue that person, quantifying what loss they suffered as a result of the breach.

• The articles are a public document that is governed by company law. If someone does not act in accordance with company law, the action that was taken is seen to be invalid - and everything else that flows from that action.

• The employment agreement is another private agreement, this time governed by employment law. If an employer doesn’t act in line with this, the employment tribunal can get involved.

What key things should we consider when discussing vesting?

• You should agree that all shares are issued up front to keep things clean and simple. This is normal market practice.
• You should agree that if someone doesn’t follow the rules, the directors can determine a proportion of their shares as unvested in accordance with the articles, and convert them to deferred shares. This is how vesting works.
• You should agree that deferred shares do not have votes or other useful rights. So even though they remain visible on the cap table, they are taken out of the equation when it comes to calculating true ownership.
• You should all understand that this ‘give then take away’ approach is called reverse vesting and is the right way to do it with a UK company.
• You should all see vesting as an incentive that works equally for everyone - don’t spend too long discussing this term or trying to deviate from what’s standard.

Term: good leavers and bad leavers

What is a leaver?

A leaver is someone who has left the company.

Now we want to classify them as good or bad leavers, so we can determine what happens to their shares.

What is a good leaver and what is a bad leaver?

Good leavers typically leave under fair circumstances: giving normal notice, redundancy, death or after the vesting period ends.

Bad leavers and those who leave as a result of termination of their contract for cause, or gross misconduct, or failure to do something under the shareholders’ agreement, or breaching a restrictive covenant (like a non-compete) even after they have left the company.

Why does it matter if you are a good leaver or a bad leaver?

It matters because it determines what happens to your shares.

If you’re a good leaver, you keep your vested shares; only the unvested shares become deferred.

If you’re a bad leaver, you lose all your shares (vested or not),

Some founders negotiate always keeping vested shares, whether a bad leaver or a good leaver.

How is someone classified as a good leaver or bad leaver?

The shareholders’ agreement should contain precise wording that makes it clear.

It’s quite common to explicitly define what a ‘bad leaver’ is; for example:

• someone dismissed for gross misconduct, or
• someone who reveals company secrets to a competitor a week after leaving.

A ‘good leaver’ would then be everyone else; for example:

• someone who changes jobs, or
• someone who is made redundant.

What is there to negotiate when it comes to being a leaver?

There is a fairly standard list of what constitutes good and bad. But you may want to supplement it by discussing it this way:

• Which departure scenarios should be treated leniently?
• Which should be treated harshly?
• What happens to shares in each case?

I have seen plenty of shareholders’ agreements which tie being a leaver to the termination of that person’s contract. But what if there was never any agreement made? Your shareholders’ agreement should deal with this. Here’s something to consider:

• First:
  • agree that where a shareholder has an employment contract or consultancy agreement with the company, the procedures in that document will determine whether someone’s employment or appointment is terminated
• Else:
  • prepare a schedule of duties / responsibilities for that shareholder and attach it to the shareholders’ agreement, stating in the agreement that failure to deliver on that schedule could result in being classified as a leaver, but
  • if an employment contract / consultancy agreement is put in place, that takes priority
• Otherwise (nightmare scenario):
  • there is no schedule of duties or employment contract, so
  • give the other shareholders the ultimate discretion as to whether someone is a good or bad leaver.

Term: resolving deadlocks

What is a deadlock?

A deadlock is a situation where shareholders and/or directors cannot reach agreement on an official decision, preventing the company from moving forward.

What is the difference between a deadlock between directors and a deadlock between shareholders?

A deadlock between directors usually relates to daily management of the company, such as whether to accept a quote for some work to be done.

A deadlock between shareholders usually relates to more significant decisions, such as whether to allow new shares to be issued.

What does deadlock between directors look like?

The directors are in charge of day to day decision-making. Formal decisions require board resolutions to be passed. Board resolutions are passed by a majority of directors. For example:

• The directors get quotes from 3 software developers to build a product. They vote on which one to go with.
• If there are 3 directors, 2 of them need to agree for a board resolution to be passed.
• If there are 2 directors, and 1 of them does not agree, the board resolution cannot be passed.

Deadlock between directors does not definitively mean that the entire company is stuck from moving forward. It might cause a delay while a further quote for work is obtained. The dissenting director might change their mind after speaking to one of the developers. In every business, discussion and communication can help convince directors to change their stance.

What methods exist to resolve deadlocks between directors?

You should start with practical steps such as reframing the proposal or pushing for consensus through further discussion.

If a genuine legal deadlock remains, a shareholders’ agreement typically resolves it by giving the chair a casting vote, allowing shareholders to intervene by reconstituting the board or issuing directions, or sending the issue to an independent third party (such as an expert or mediator) for a final binding decision.

What does a deadlock between shareholders look like?

Shareholders must always decide on major matters such as issuing new shares and altering articles. For these matters, there will be a voting threshold prescribed by company law. If enough votes are not obtained, the proposal simply doesn’t pass. This is not a deadlock!

A genuine deadlock arises when equal numbers of shareholders are in favour of and against a particular action being taken. This generally only happens when:

• there are 2 shareholders (or 2 distinct groups of shareholders) with equal voting power (50/50),
• the issue is one that needs to be decided by shareholders (whether under company or contract law),
• neither shareholder (or group) can unilaterally force a decision, and
• the company cannot continue without that decision being made.

This kind of deadlock is uncommon under company law alone (although there is a brief list of things that require 100% shareholder consent, such as increasing shareholders’ liability or varying class rights). It becomes most significant where a shareholders’ agreement creates matters requiring unanimous consent.

What methods exist to resolve deadlocks between shareholders?

Again, start with practical efforts like revisiting the proposal, adjusting its scope or trying to negotiate a compromise. If a genuine deadlock persists, the shareholders’ agreement should provide formal mechanisms to resolve. For example:

• Mediation or other third party input; a neutral person helps negotiate a settlement or a specialist is appointed to make a binding decision.
• Buy-sell mechanisms such as:
  • Russian Roulette or a Texas Shoot-out; where one shareholder offers to buy the other’s shares at a set price and the recipient must accept the offer or buy the offeror out at the same price, or
  • one shareholder buying out the other at a fair value.
• Forced sale of the company to a third party.

When should deadlock provisions be triggered?

As a last resort. If something is contentious the best approach is to discuss, negotiate, reframe, reconsider and settle. The legal route should never be your first option.

How do we negotiate the best approach to resolve deadlocks?

Consider each shareholders’ bargaining power, financial capacity and the dynamics of the relationship between them. Now is the best time to discuss these matters - you will not agree on how to resolve matters when there is an actual deadlock.

For 50/50 owners, the best solution is often mutual buy-sell mechanisms. This allows one founder to totally exit the company at a fair price.

Most importantly, you need to match the chosen mechanism to each shareholders’ ability to execute: there is no point introducing Russian Roulette if only one can finance the buyout.

Term: protecting minority shareholders

What is a minority shareholder?

A minority shareholder is usually someone with less than 50% - and is therefore subject to the will of the majority.

Why do minority shareholders need protection?

Imagine this scenario. You put £100k into a company with a mate in exchange for 20%. Your friend and his wife are the majority shareholders and also the only directors - you’re happy to take a back seat. You’re a minority shareholder. There’s no shareholders’ agreement.

Over time, your buddy:

• Doesn’t provision for / refuses to declare dividends - they get a fat salary; you get nothing.
• Awards themselves bonuses and benefits - company car, pension contributions, health insurance.
• Dilutes your shareholding - issues new shares to his kids without telling you.
• Excludes you - you have no idea how the company operates day to day.
• Blocks your exit - telling a buyer that you’re a happy silent partner and leaving you behind.

How are minority shareholders protected under default company law?

There is limited protection; they all require going to court after the event:

• claiming that the minority have been treated unfairly,
• making a claim against the directors on behalf of the company, or
• asking for the company to be wound up.

Nobody wants to do this - it’s stressful, expensive and unpleasant.

What additional rights could minority shareholders have under a shareholders’ agreement?

• The right to be asked for consent before anything that affects them takes place.
• The right to be bought out on favourable terms.
• The right to have a director appointed on their behalf.
• The right to additional information beyond the bare minimum required under default company law.

How do we agree on which minority shareholder protections to include?

Here is a sensible list of actions that should require consent:

• changing the company’s core identity or the type of business it does,
• changing how many shares there are or what rights shares have,
• changing the company’s articles,
• closing the company down,
• appointing, removing and paying directors,
• doing anything that’s outside normal business practice,
• doing business with connected people, and
• shares being bought, sold or transferred,

When it comes to implementing this, you will also need to consider “what percentage of shareholders will need to give consent?” for the action to take place. Unanimous (100%) is the fairest, but there may be reasons to go for less - someone may truly want to be a silent partner with no input or expectations at all. And don’t forget: unanimous consent can lead to deadlock if there are even numbers of people voting.

How can a shareholders’ agreement help a minority shareholder in an exit scenario?

An exit scenario is where someone wants to buy the majority of the company’s shares.

Tag-along rights are helpful where a percentage (often 51%) of the shareholders agree to sell to the buyer. Tag-along rights enable the minority to ‘tag along’ with the other shareholders, on the same terms they agree with the buyer.

Drag-along rights, while often included, actually help the majority (often 75%) by allowing them to ‘drag’ the minority along with them in a sale.

Other less commonly included protections are:

• a minimum valuation for the company when it comes to selling shares,
• enhanced information rights during a sale process, or
• super majority consent for specific situations, such as exits.

Term: defining the business

What does defining the business mean?

It means coming up with a terse, accurate description of the work that the company carries out.

For example:

the design, development and commercialisation of cloud based project management software for the construction industry in the United Kingdom

or:

the provision of corporate tax advisory services to mid-market companies operating in the manufacturing and retail sectors in England and Wales

or

the manufacture and wholesale distribution of organic skincare products to retailers and spas throughout the UK

Why is it important to define the business when putting together a shareholders’ agreement?

A singular definition should be used throughout all legal documents that rely on this meaning. For example:

• if intellectual property (IP) is being developed for the company by contractors, you’d use the definition to encompass all of the work that contractor does for the company, or
• if non-competes or other restrictions (restrictive covenants) are being put in place for the shareholders, you’d use the definition to scope the restrictions enough to make them enforceable, or
• if the company wants to share some confidential information with a third party (with an NDA), you’d use the definition to scope what is considered confidential.

What makes a business definition effective?

Take the examples above. You should note that:

• they are specific without being rigid - detailed enough to be meaningful without being obsolete if the company does something slightly different,
• there are geographic limitations - each is territorially scoped, which is essential to make some agreements enforceable,
• they are functionally clear - they describe what the company does, not what industry it’s in,
• the scope is reasonable overall - courts tend not to look too favourably upon overly broad definitions as this can be considered anti-competitive.

What are some examples of unhelpful business definitions?

the provision of technology services

• too vague - what type of technology? What services? Provided how? This could include anything from IT support to AI integration to erecting telephone poles. A restrictive covenant based on this would be unreasonable and it provides no meaningful guidance for IP assignment or NDA scope.

the development and sale of the SuperAwesome26 software app using NextJS framework to construction companies with 50-200 employees in Greater London

• so specific that it is immediately out of date. What happens when you release version 27? What if you decide to use a different tech stack, target a larger company or expand to Manchester?

the manufacture and distribution of consumer electronic products worldwide and online

• no realistic geographic restriction makes this unenforceable when used as the basis for a non-compete.

operating as a disruptive innovator in the fintech space, leveraging cutting-edge solutions to help revolutionise financial services for British companies and business people

• sounds like marketing jargon, doesn’t tell you what the company actually does.

carrying on the business of the company as currently conducted from time to time

• sounds fancy but defines nothing and is completely useless.

a company operating in the renewable energy sector in the United Kingdom

• describes the industry but not what the company does within it. Manufacture solar panels? Provide consultancy? The lack of a functional description makes it impossible to apply to IP assignments, NDAs or non-competes.

How do we come up with a decent business definition?

Here is a practical approach that past clients have found helpful:

1. Note that a good definition contains 3 elements:

   • the activity or function - what your company does (“the design, development and provision of”)
   • the product or service - what you sell and to who (“AI assistant software to GPs”)
   • the location - where you sell it (“in the UK”)

2. Appreciate the importance of this task. This is where I have seen many shareholders’ agreements crash. The definition used is often weak, something to fill out quickly before you get to the real meaty stuff.

   The truth is, the definition of the business is just as important. It determines what a departing shareholder can and cannot do, what IP everyone must hand over, and what constitutes a breach of confidentiality (which could even be grounds to dismiss someone with cause).

   You should spend adequate time on this task, even if you engage a lawyer to help you draft the agreement. As a shareholder you should be insisting on this definition being right.

3. Start jotting down your own variations on the theme:

   our company [activity] [product or service] [customer] [location]

4. Test your drafts against the requirements:

   • for IP assignment: does your wording capture all IP the company needs to own? If a person creates something that falls outside of this definition, you may struggle to argue that the company should own it.

   • for restrictive covenants: is it narrow enough to be enforceable but broad enough to protect your legitimate business interests? Would a court see this as reasonable?

   • for NDAs: does the wording appropriately scope what information relates to the business? Information that falls outside of this definition would not qualify as confidential business information.

5. Test your drafts against hypothetical scenarios. Ask yourself:

   if we launched product X, would that fall within this definition?

   if a founder left and started doing Y, would that breach their non-compete?

   if we shared Z info, would that be good enough to ensure the info we want to share qualifies as confidential?

6. Refine it until everyone agrees that it “feels right”.

Term: intellectual property

What is intellectual property and how is it created?

Intellectual property: intangible creations that have commercial value and can be legally protected.

The main categories are:

• copyright: protects original creative work (software, business plans, illustrations, photos, video). The easiest to create - simply exists in new work, does not require registration.

• trade secrets: protect valuable confidential information. Legal protection in the form of confidentiality agreements and NDAs.

• trade marks: protect reputation, brand names, logos and distinctive signatures. Lengthy process and considerable cost.

• patents: protect inventions and technical innovation. Complicated and time consuming application process. Becomes public knowledge.

A company typically relies on a significant amount of IP: software, branding, proprietary processes, customer lists and even know-how that gives them a competitive advantage.

Why is intellectual property relevant when putting together a shareholders’ agreement?

The company needs to own the IP that relates to its business.

There is probably no existing assignment of IP from the shareholders, so doing it at this time makes sense.

By including an assignment of the IP that relates to the business (which you already defined so clearly) from the shareholders to the company, you can take care of this in one place - for the shareholders, at least.

How do we know what intellectual property exists?

If you don’t already know you will need to conduct an IP audit. This involves:

• Reviewing what’s been created and is relied on by the company: code, designs, notes, sketches, customer contact details.
• Identify who created it: will this person be a shareholder?
• Determine current ownership: did the creator already transfer it to someone else?

What do we need to do to ensure the company owns the right intellectual property?

IP that is protected by copyright, trade mark and patent law requires assignment from one owner to another, in writing.

Individual things do not need to be assigned separately. A single assignment can include an entire body of work.

Trade secrets and know-how do not transfer well through assignment alone; they require two things:

1. an agreement that confidential information belongs to the company, and
2. operational controls that maintain secrecy (access policies etc).

What about open-source software or other third-party dependencies that we have?

It’s difficult to run a business without being dependant on third-party IP. The most important thing is to ensure that those dependencies are understood, properly licensed and compatible with your company’s commercial plans. For example:

• software libraries are often used under permissive open-source licences,
• cloud services are essential for making software products available to the world, or
• proprietary data or LLM tooling might be something you pay a licence fee to access.

Do we need separate assignments of intellectual property for each shareholder?

For most early stage startups, probably not. Provided that your business definition is wide enough and the IP that is assigned under the shareholders’ agreement captures existing and future IP that relates to the business, this is probably sufficient.

What should our position be on intellectual property when it comes to putting together the shareholders’ agreement?

You should agree a unified stance:

• the company should own all relevant IP that relates to the business,
• every person involved (shareholder or not) will assign existing and future IP that relates to the business to the company,
• this should happen as part of the shareholders’ agreement where possible, and
• it should be clear what third-party dependencies exist, and you should agree that depending on any without an appropriate licence should be avoided.

It might make sense for one person to take (unofficial) responsibility for managing IP - which includes keeping any necessary registrations up to date, taking charge of trade secret policies and having overall awareness about new IP which is developed for the business and ensuring that it is assigned properly to the company.

Term: non-competes and other restrictions

What is a non-compete? What other types of restrictions exist?

A non-compete is a type of restrictive covenant. It is where a person agrees not to do something that competes with the company while they are employed. Other types of restrictive covenants relating to companies include:

• non-poaching: where a person agrees not to poach (steal) the company’s workers or advisors,

• non-solicitation: where a person agrees not to solicit (get business from) the company’s customers or clients, and

• non-dealing: where a person agrees not to solicit (deal with) with the company’s suppliers.

What is a restrictive covenant?

A restrictive covenant is a clause in a contract which is designed to protect business interests.

They can only be enforced if they are considered reasonable and go no further than is needed to protect legitimate business interests.

This means a restriction that is too broad (“you cannot work for another tech company”) may have no legal effect.

On the other hand, a reasonable restriction (“you cannot work for any direct competitor in the UK for the next 6 months”) is likely to be enforceable, and so the person on the other end of it is more likely to respect it.

PEDANTIC POINT

• There is another type of restrictive covenant which relates to land and is not relevant in the context of putting together a shareholders’ agreement.

Are restrictive covenants essential in a shareholders’ agreement?

Yes. Ultimately the shareholders’ agreement exists to protect the company, and restrictive covenants are one of the many tools used to do this. For example:

• 3 shareholders start a company developing legal tech software for law firms.
• The company is successful and has 5 large firms as clients.
• One shareholder leaves, taking half the staff and 3 clients with him to set up a similar business.
• The remaining 2 shareholders cannot stop him and eventually, the company fails.

Without restrictive covenants in place, this is an all too common occurrence.

Do restrictive covenants only appear in shareholders’ agreements?

No. Restrictive covenants also commonly appear in employment contracts and less commonly in consultancy agreements (and other contracts for services rather than employment).

How do restrictive covenants work?

They work in a few ways:

• when a document containing one is signed: creates the restriction immediately; the shareholder will be aware of it and plan accordingly around it,

• when someone leaves: some companies remind shareholders of their restrictions and what the consequences of breaching them might be,

• when someone breaches: the practical power a company has is the threat of litigation (“you have breached our non-compete and we need you to stop doing what you’re doing NOW”); the more reasonable the restriction is the more seriously the threat is likely to be taken, and

• when someone is setting up on their own: their own lenders or investors often ask about compliance; ignoring covenants can jeopardise funding.

The point is, if the restriction exists (and is reasonable), it helps stop behaviour that can damage the company’s business - even if it’s never going to be enforced.

What are reasonable terms for restrictive covenants in shareholders’ agreements?

What is reasonable ultimately depends on your company’s industry and the people involved. Here are some absurd examples, which I’ll explain in more depth below.

• Arnold is an ex-lawyer in a company selling legal software, with connections to the legal industry. His restrictive covenants are:

  • non-compete: can’t compete with the business, while he holds shares, and 12 months after he stops,
  • non-poaching: for 18 months after he leaves, he can’t poach anyone who was employed during his last 12 months at the company,
  • non-solicitation: for 18 months after he leaves, he can’t do competing business with any person who was a customer of the company during his last 12 months there, and
  • non-dealing: for 6 months after he leaves, he can’t work with anyone who was a supplier to the company during his last 18 months there.

• Sylvester is a former salesperson at a niche AI startup. His restrictive covenants are:

  • non-compete: for 5 years after he leaves, he “can’t engage in any business involving software, hardware, data or tech of any kind, anywhere in the world”,
  • non-poaching: indefinitely restricted from “hiring any person who has ever worked for the company”,
  • non-solicitation: global, unlimited in duration and applies to “any actual or potential customer”, and
  • non-dealing: covers every supplier the company has ever used.

• Bruce is a hairdresser in a new hair salon startup. His restrictive covenants are:

  • non-compete: for 12 months after he leaves, he “can’t work for another hairdressing salon in London”,
  • non-poaching: he can’t recruit stylists who worked with him in his final 6 months,
  • non-solicitation: he can’t approach clients he personally worked for in his final 12 months, and
  • non-dealing: he can’t work for a specific list of named high value clients for 6 months after he leaves.

What makes a restrictive covenant enforceable (or unenforceable)?

Courts look for two things:

• a legitimate business interest to protect, and
• a restriction that is not wider than necessary.

Let’s consider the above examples:

• Arnold’s restrictive covenants target concrete interests such as client relationships and trade secrets. The durations for each are modest and they seem to be in line with his actual influence at the company. Likely to be enforceable.
• Sylvester’s restrictive covenants are far wider than the interests at stake: global restrictions lasting for years on end, encompassing entire industries. They go too far. Unenforceable.
• Bruce’s restrictive covenants are more difficult. Two of them (non-solicitation and non-dealing) are tied to clients he actually worked with and are time limited, which makes them seem more reasonable. The London-wide 12 month non-compete seems more absurd - is it really necessary to protect a single salon? Could be argued either way.

How do we determine what restrictive covenants to include in a shareholders’ agreement?

You should probably start with the 4 most common ones: non-competes, non-poaching, non-solicitation and non-dealing.

As for the terms of each:

1. Start by mapping key business interests - list clients, suppliers, staff, IP and know-how that is critical to the company.
2. Identify shareholder influence - who has direct relationships or strategic knowledge?
3. Set realistic scope - define how long each one should last and where it should apply.
4. Tie it all to the business - everything should be scoped to the business the company carries out.
5. Benchmark against industry - find out what similar sized companies in your industry do.

What are the risks of agreeing overly restrictive terms?

There are a two major risks:

1. the person agreeing to them knows they are overly restrictive and they take the action you are trying to prevent, knowing that they cannot be enforced, and
2. it goes to court and the court decides that the restriction is unenforceable - money and effort wasted.

What happens if only one of the restrictions is unreasonable?

Contracts that include restrictive covenants typically also include another boilerplate clause titled ‘severance’.

The rule of severance says that where a clause in a contract is found to be unenforceable, that clause can be cut off (severed) without the rest of the contract being affected.

This means that a single restrictive covenant being unenforceable does not affect any other restrictive covenants that might exist.

How difficult is it to enforce a restrictive covenant?

They are typically enforced like this:

• the company gets wind of someone having breached the restriction,
• the company sends a letter before action to that person formally notifying them they may be breaching and demanding they comply,
• the company gathers evidence needed to prove breach,
• the company instructs lawyers to assess how enforceable the covenant is and prepare court documents if needed,
• the company applies to the court to obtain an interim injunction against the person doing whatever they’re doing,
• throughout all of this, the company and the person negotiate and come to a settlement, or
• the court makes a decision and directs what a suitable outcome is.

Most of the time, the letter before action step will prompt the shareholder to stop doing whatever they are doing - provided that the restrictive covenant is enforceable - and both parties know it.

Is it common to have different restrictive covenants for different people in a shareholders’ agreement?

No. In a shareholders’ agreement it is often sensible for everyone to have the same terms.

This makes drafting and administration easier. It also ensures everyone is on the same page.

However, it is entirely possible to have different restrictions in place for different people.

I hear non-competes might be banned in 2026. What is this about?

As part of the November 2025 budget, the UK government released a working paper on options for reform of non-completes.

According to this paper, non-competes “play a part in restricting employee movement, limiting knowledge spillovers and can undermine incentives for innovation”. It goes on to reiterate what we’ve talked about above; that restrictive covenants need to be reasonable in order to be enforceable. Interestingly, it also says that even if unlikely to be enforceable, workers may “perceive the clause as binding and comply with it for fear of legal repercussions”.

To deal with this, they’ve proposed:

• a limit on how long a non-compete can last (3 months is the figure being thrown around), perhaps taking into account company size,
• an outright ban on non-competes (and maybe on the other types of clause too, if they also restrain a person’s ability to work),
• banning them below a certain salary threshold (although this seems to apply to employment contracts rather than shareholders’ agreements).

What can you do with this knowledge?

• keep an eye on what the Department for Business & Trade are up to; if this becomes law, it will be big news;
• consider a 3 month restriction - would it work for your company?

Term: right to appoint a director

Why would a shareholder need the right to appoint a director?

A shareholder is someone who holds shares in a company.

A director is a person who is responsible for the daily management of a company.

The two roles are separate, with shareholders generally only involved when very important decisions need to be made.

Being a shareholder does not give a person the automatic right to also be a director.

But having the right to appoint a director is often important, because it gives a shareholder:

• protection of their investment,
• access to information only available to directors, and
• significant influence over how the company operates.

What are the risks of giving shareholders the right to appoint a director?

There are 3 risks:

1. decision making risks:

   • an appointee might push the appointing shareholder’s agenda over the company’s interests
   • increased chance of disagreements that could lead to deadlock situations

2. risk of confidential information leaking

   • sensitive financial or commercial data might get back to a shareholder who has a bigger interest in a competing business

3. operational risks

   • misalignment between general management and an appointee
   • an inexperienced or unengaged appointee can reduce board’s effectiveness

Don’t default to ‘everyone should have the right to appoint a director’.

What needs to be discussed when considering giving shareholders this right?

Each shareholder needs to understand the importance of being a director:

• directors are responsible for the day to day operations of the company,
• directors have duties under law to act in the best interests of the shareholders generally, and
• directors are under legal obligations about how to behave and present information about the company.

And they should also discuss:

• the fact that appointed directors’ duties are owed to the company, not to the person who appointed them,
• how sensitive information will be handled and whether any safeguards should be put in place, and
• how the right to appoint a director might affect board balance and the company’s decision making abilities.

What should the default position be when it comes to having the right to appoint a director?

By default, no shareholder should have the right to appoint a director. Instead:

• directors are elected by shareholders collectively, not individually
• individual appointment rights should only be given where the shareholder’s contribution justifies it - e.g. a major strategic investor or an original founder

But if one shareholder requires it, then consider if the fairest solution is to give the same right to all shareholders.

OK, we each understand the main terms. What’s next?

Once everyone is aligned, put them in writing. You can do this in any format you like - the point is to keep a record of what everyone has agreed is the best route to take. The heads of terms / term sheet document is a sensible way to do it. Example next.