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Founders and Shareholders agreements

Important differences between a Founder’s and Shareholder’s Agreement:

Founder’s Agreement and Shareholder’s Agreement

  • There’s a lot of uncertainty about the difference between a founder’s and shareholder’s agreement.
  • A founders’ agreement, in other words, attempts to outline the fundamentals of the working between the founders of a business . Such as the founding team’s duties and obligations, stock ownership, and vesting.
  • This founder’s agreement is much like a shareholder’s agreement in that it’s commonly used at a business tool. As the firm expands, it is usually superseded with a shareholder’s agreement.

A) Founders’ Agreement 

  • When you establish a new business, the first crucial document to sign is a founder’s agreement. When you’re first starting out with your company and trying to get it off the ground it’s important to have a clear knowledge of the key issues with your co-founders in order to help the firm accomplish its objectives. A founders’ agreement is a set of obligations company founders have to each other and the company, detailing their roles, responsibilities, salary, equity compensation, and more.
  • When registering your company, you would need a: 
    • Memorandum of Association, This is a legal agreement that all of the firm’s original shareholders signed in order to form the company.
    • Articles of Association, which are the written rules on running the company.

The benefits of having a founder’s agreement in place are: 

  • Aligns expectations– A Founders’ Agreement permits you to talk uninhibitedly with your prime supporters about the exact issues that will direct how the organization is managed.
  • Resolve issues– having a Founders’ Agreement in place helps in resolving future potential issues.
  • Good governance– Even though company law is in place, it is best to set out roles and responsibilities at the outset.

Three fundamental issues you should consider in your Founder’s and shareholder’s agreement are-

  • Roles and responsibilities: A Co-founding team,need to collaborate. But it does not mean that everyone should be in charge of everything. It should be clarified to whom the roles and responsibilities belong.
  • Time:Knowing how much time you will each need to commit is vital. Like the minimum number of hours per week, you should all be investing in the business.
  • Equity and vesting: This can be a delicate topic.You must agree on the distribution of the equity. In order to provide complete transparency about who will receive what, when the company opens. Not all co-founders necessarily need to take the same share. Again, it would be best if you thought about the value attached to the work. And funding if any each founder is putting in money.

B) Shareholders’ Agreement 

The shareholders’ agreement is an effective legal action to complete the relationship between shareholders. It’s legal force is less compared to that of the Articles of Association. So it must be made clear that it would override them if there is a conflict and it remains confidential. 

Content of the shareholders’ agreement:

Apart from the elements related to the operation of the shareholders’ agreement (duration, termination, etc.). The following are some of the most common clauses:

  • The pre-emption clause: if one of the signatories wishes to sell his securities, he will have to offer them as a priority to the other signatories.
  • The approval clause: Before a signatory may continue with the sale of his or her shares, the signatories must agree.
  • The cap on the shareholdings: the purpose of this clause is to provide that none of the signatories can hold more than X% of the company’s capital.
  • Resale right: if one of the signatories receives an acquisition proposal, he must ask the potential buyer to extend his proposal to the other shareholders. So everyone leaves the company at the same time.
  • The inalienability clause: The signatories agree not to sell their shares for a pre-determined length of time.

Clauses related to the functioning of the company:

  • The unanimous agreement clause: this clause makes it possible to provide that certain decisions at the company level (to be specified) require the unanimous agreement of the shareholders.
  • The appointment of an officer clause: The shareholders must nominate the person mentioned in the provision as a corporate officer.
  • The distribution of the profit: it is, for example, possible to foresee the dividend policy practiced by the company. The shareholders agree, for example, to allocate a certain part of the profit in dividends.
  • A non-competition commitment: The shareholders agree not to participate in activities that are competitive with the firm in which they own stock.

The preparation of a founders’ or shareholders’ agreement must always be done with the assistance of a corporate lawyer. To make your process as secure as possible and incorporate the right legal protections. Contact help@bizlawuk.co.uk or WhatsApp us on 07583452230 if setting up a company and we can assist in bespoke drafting of such important documents. Visit www.bizlawuk.co.uk to find out more about how we can help you, follow our useful social media posts, like and share to help others. 

Reina D'costa

Dual qualified, experienced, practical and proactive solicitor. Founder of Bizlaw UK, a new model legal service consultancy.