A shareholders' agreement prevents uncomfortable discussions and costly disputes by establishing clear decision-making processes, what happens when people leave and dispute resolution mechanisms.
Our all-inclusive fixed price matter takes you through the process by breaking it into logic, easy to follow steps and ensuring that you don't get overwhelmed by asking you the right questions at the right time.
You've got an initial team and a great idea. Maybe you've incorporated a company, but you haven't done anything else.
The time has come to formalise the arrangement between you and your co-founders and advisors. You need to ensure vesting arrangements are in place for you and your team and that the equity split that you've agreed in principle is put into effect properly.
You've heard that you need a shareholders' agreement and maybe some new articles but you don't know what that involves or what else might be necessary.
Law firms are quoting you upwards of £3k just to put together what your research tells you is some fairly basic documentation that will probably get ripped up as soon as you find some investors.
You're considering the most cost effective way to do this, but you want to make sure it's done right.
This matter is for you.
You want to be clear about how your business will be run.
You need to have the difficult conversations before it's too late.
You want to incentivise co-founders to stay with the business.
You want to ensure that everyone with a stake in the business is treated fairly.
You need to know how disagreements will be resolved.
You want investors and business partners to know you take your legal responsibilities seriously.
You need to be 100% sure that you're starting off on the right foot.
If you haven't incorporated your company yet, this is the first step. The simplest way is to do this yourself via Companies House. The fee for this is £50 and the company will be formed within 24 hours. You'll need to specify who the initial directors and shareholders will be, the value of each ordinary share, and how many ordinary shares each shareholder will have. If you don't have this info yet, you can just specify a single shareholder and we'll deal with issuing shares to the co-founders in the correct proportions as part of the matter.
Each share in your company has a minimum value, which is also called its 'nominal' or 'par' value. The default is often £1, but it's common to go with fractions of shares like £0.0001 instead. This is important because the nominal value of each share is multiplied by the total number of shares you hold: so if you create a company with 100 shares of £1 each, then your total liability (if the company fails) is limited at £100. If you're the only shareholder then a good starting point is 1,000 ordinary shares of £0.001 each. This gives you an individual total liability of £1.
The existing shareholders are those people who already have shares issued to them and appear in your company's filing history. Proposed shareholders are people that you've promised a percentage of ownership to. This is likely to be co-founders, advisors etc. You wouldn't include people that will be part of a share option scheme in the future.
Getting the definition of what your business does right is crucial because it directly impacts several things that might be included in a shareholders' agreement and other related docs that you need.
First, if the directors are to be limited to only working on the business as defined, an improper definition might put them in breach of their duties.
Second, when it comes to assigning intellectual property from shareholders and other people who do work for you, a clear definition reduces arguments later and ensures that the business owns what it should.
Finally, if you're thinking about imposing restrictive covenants on departing shareholders, these need to be limited in scope in order to be enforceable.
To come up with an effective definition you should think along these lines: 'THE COMPANY is in the business of PROVIDING GOODS OR SERVICES to TARGET MARKET within GEOGRAPHICAL AREA'.
For example, something like 'Mitnick Limited is a specialised cybersecurity consultancy that provides proactive technology driven solutions to protect digital systems, networks and data from unauthorised access, exploitation or disruption to enterprise clients that are headquartered in the UK' would be pretty good, whereas 'cyber security consultants' would not.
Directors are responsible for the day to day decision making of the company. Generally speaking directors have a duty to act in good faith and for the benefit of the shareholders together. They are also responsible for ensuring that the company makes its proper filings and prepares and submits its annual accounts on time. Directors don't necessarily have to live in the UK, nor should they automatically be considered employees of the company - it's perfectly possible for someone to be a director in their spare time.
However, taking on a directorship is a serious role that requires proper participation in the decision making process to ensure that they are acting in line with their duties.
So when thinking about who might be suitable, consider whether they will be able to devote the proper amount of time and attention to furthering the business!
Participants in early stage companies tend to have specific roles assigned to them but it's often difficult to pin down what their day to day responsibilities are and what the expectations are for time that should be committed to the business. Although many small companies get away without defining these in detail, it's particularly important if you decide to adopt vesting provisions without creating separate employment (or engagement) agreements for those shareholders. Having a detailed list of responsibilities for each shareholder can help the company fairly determine whether someone is not pulling their weight.
Share vesting is an arrangement whereby ordinary shares are issued to shareholders up front, but if a shareholder leaves within the 'vesting period' (typically 3-4 years) then they only get to keep the proportion of their shares that have actually vested. For example, if a person has 90 shares and a 3 year vesting schedule, and they decide to leave the company after 1.5 years, then they will get to keep 45 shares.
It's also popular to discuss 'cliff periods' when agreeing a vesting schedule. A cliff period is an initial period (typically 12 months) which, if the person leaves within this period, means that they will not receive any of their shares.
Another consideration is that vesting arrangements tend to 'accelerate' if a liquidity event takes place. For example, if the vesting period is 4 years but the company is acquired within 2, all unvested shares at that point would be considered vested, so that the shareholders can recoup the maximum value at the time of sale in respect of their entire shareholdings.
Shareholders, advisors and other people who are involved in the early stages of a business can all create different types of intellectual property. This might include design and art work, code and even contributions to the business plan. It's important that the company becomes the legal owner of all of this intellectual property for a couple of reasons.
First, it's good practice to keep ownership of all intellectual property that relates to the company's business within the company's control so that it can enforce those rights. For example, if a third party decides to copy your logo but you don't own it, it might be difficult to write to that third party asking them to stop using the copy!
Second, if investors or acquirers are looking to put money into your company, they will want assurance that you own all of the associated intellectual property. This is because intellectual property is itself an asset that has an inherent value, and where someone invests in you they will want to ensure that they have some right to that value too.
Third, if you are looking to licence the use of your brand or do your business relies on your intellectual property in some way (for example, your software's backend code), then you need to ensure that you have the appropriate permission in place to actually carry out that business.
By putting intellectual property assignments in place you can ensure that your company owns the intellectual property that it relies on. So start making a list of what all of your intellectual property is and who created it!
Try to put yourself in each shareholders' shoes and think about what information they'd want access to, how regularly they would want it and in what format.
Shareholders' agreements introduce the concept of 'shareholder consent', which is a contractual right to be asked for consent before certain actions are taken by the company or the directors. These typically relate to things that will affect the shareholders, such as agreeing to issue new shares to someone (which would dilute the existing shareholders) or amending the articles (which might alter their rights). There is a fairly standard list of these consents but try to consider whether you or any of the other shareholders might have other expectations.
Dividends are usually paid out of profits. In the startup world it's uncommon to have an obligation for the company to pay out dividends on any regular basis. However, in small family owned businesses it can be a useful provision to include to ensure that the directors regularly make dividend payments. The alternative, if dividends aren't paid, is for those profits to be reinvested into the business. By default, directors have the discretion to decide which option to go for.
Think about how shares should be handled if a shareholder exits or becomes incapacitated. Common options include buyback clauses (although this comes with some added complexity that is probably best to avoid), insurance policies, or pre-agreed valuation methods to ensure fairness and continuity.
Decide whether shareholders can freely transfer shares or if restrictions (e.g., right of first refusal for other shareholders) should apply to maintain control and prevent unwanted third party involvement.
You'll all need to agree on a process for handling external buyout offers e.g. drag-along (which allows a majority of selling shareholders to drag the remaining shareholders along with them in a sale of their shares on the same terms) or tag-along (which allows the minority to tag along with the majority if they agree to sell their shares, again on the same terms) rights to protect minority shareholders or requiring unanimous approval for major changes.
You should think about what would constitute a fair valuation method (e.g. fixed price, formula-based, or independent valuation) to avoid disputes during exits or transfers.
It's common practice to include reasonable restrictions to prevent departing shareholders from competing with the business, balancing protection with their right to work. Note that they must be reasonable or they won't be enforceable on the basis that you are restraining someone's ability to trade. Six to 12 months is typical.
Think about how directors are chosen and appointed (e.g. by majority vote, with rotating roles, or giving individual shareholders the right to appoint a director each) to align control with business goals and shareholder influence.
The shareholders' agreement
This is a private contract that governs the relationship between your shareholders. Nobody else will see it, so where we put confidential or sensitive information. It's also where we'll include the details about what kind of business your company carries on, what kinds of actions need written consent from the shareholders before they are carried out, and where any restrictions on the parties to be agreed. It's the main agreement in this matter.
The articles of association
The articles are your company's public rule book. Everyone company has them, and the default ones work fairly well. When you adopt a shareholders' agreement it's often necessary to update the defaults to work together with that document. Your company's articles are governed by company law and so they apply to everyone officially involved: directors and shareholders being the main focus. However, they're not personal to individual shareholders, and only deal with how they should behave in a general way. It usually comes secondary to the shareholders' agreement, so while they define the formal legal framework of how the company should operate, the shareholders' agreement dictates how they agree to operate within that framework.
Share subscription letters & ITEPA elections
If you've promised shareholdings to co-founders but have yet to issue them, they'll need to apply to the company for their new shares to be allotted and issued to them. Co-founders will typically only pay the total nominal value for the shares they're being issued. If there are vesting provisions in the shareholders' agreement these might be considered 'restricted securities' for tax purposes and so they'll also need to sign a section 431 election, where they agree with the company that the shares shouldn't be treated this way.
Deed of adherence
If at some point after the matter is closed you want to bring an additional shareholder on, you'll need them to sign a deed of adherence to the current shareholders' agreement. This ensures that they are subject to the same rules as everyone else.
Intellectual property assignments
If any of the shareholders have created (or will create) intellectual property that should belong to the business, each of them will need to expressly assign ownership of those rights. Exactly what is assigned depends on how you define the business, which is why it's one of the important considerations listed above!
Founders' employment agreements or engagements
If the founders are to be treated as employees or consultants it's common to also have them enter into new agreements with the company as this is typically where the triggers for clawing back shares under a vesting arrangement exist (in other words, if the employment or engagement is terminated, they lose their unvested shares). This isn't always the simplest way to do things as there are other implications of having a director become an employee, but sometimes it is appropriate to formalise the relationship at this stage.
Shareholders' resolutions
If new shares are being issued to co-founders, the current directors will need authority to issue them. The default position in company law also gives existing shareholders 'pre-emption rights' on new share issues, meaning that they would be offered the option to buy new shares in proportion to their existing shareholdings (to prevent them being diluted). These pre-emption rights also typically need to be disapplied. Other shareholders' resolutions might be required, for example if the company needs to subdivide its shares into smaller nominal values. Sometimes these need to be split into separate sets of resolutions (for example, to prepare the company to do something later).
Board resolutions
Official decisions of the company's directors typically take place at a board meeting where they'll pass resolutions (often after having confirmed that the relevant shareholders' resolutions have been passed first). They'll also discuss the merits of any documents that the company needs to sign in its own name, and give the directors power to sign them.
Companies House forms
If you're subdividing existing shares, issuing new shares or amending the existing rights of a class of shareholders then Companies House needs to be informed of this within 30 days of this happening. No need to worry as these will all be included with the correct numbers and an updated statement of capital, which will show your company's ownership after the matter is closed.
You'll be informed.
You will know who has what rights in the company, what to do if something unexpected happens, how to deal with someone leaving, how share vesting works and how small companies with multiple shareholders operate generally in the UK. You'll understand the difference between a shareholders' agreement, articles, resolutions and minutes.
You'll be confident.
You and your co-founders will know that the deal you did has been properly implemented. You'll have understood the transaction process and the sorts of things a lawyer might ask you when advising you on a shareholders' agreement matter. You'll feel like you can handle the next matter yourself too.
You'll be ready to grow.
Your cap table will be up to date. If you need investment you'll be able to raise money quickly through an advance subscription agreement, or formally by issuing new shares. If you want to grow your team you'll be able to find the right documents here. If you're ready to start doing business, you'll know where to come for your contracts.