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Should I Use a Founders' Agreement or a Shareholders' Agreement?
Should I Use a Founders' Agreement or a Shareholders' Agreement?
Sriyanka Nakarmi avatar
Written by Sriyanka Nakarmi
Updated over a week ago

A Founders' Agreement is the same as a Shareholders' Agreement.

A shareholder is a person who owns a share of a company. A shareholder has certain rights that are defined by company law in your jurisdiction and the Articles of Association or Constitution of your company. Typically, these rights include the right to receive dividends from the company, the right to vote at a general meeting, and the right to receive a return of capital if the company is liquidated.

A "founder" is commonly understood as the "entrepreneur who started the business". Legally speaking, the founder is "the first shareholder" of a company. A founder has exactly the same rights as a shareholder (if they hold the same class of shares).

To govern the relationship between the founders and shareholders of a company (e.g. restrictions on transfer of shares or consents required for decision-making), you need a Shareholders' Agreement or a Founders' Agreement. On our app, this document gives you the same protection and obligations; it's only a choice of your preferred terminology and name of the agreement.

Zegal’s Shareholders’ Agreement offers a wide range of provisions. Always remember there is no “one-size-fits-all” and the legal implications of various terms must be considered on a case-by-case basis, with reference to the number of shareholders, the relative size of their shareholdings, and even their respective financial strength. Do not include provisions in a Shareholders’ Agreement without fully understanding how they work in the context of your particular business. 

Be prepared for a detailed or lengthy discussion on the various terms of a Shareholders’ Agreement. Your time and effort is well justified by the fact that even incoming shareholders in future will agree to these terms (by executing a Deed of Adherence). Or, if a new shareholder comes in with significant bargaining power, you may re-negotiate the terms and execute a new Shareholders’ Agreement.

If you are not familiar with the provisions in a Shareholders’ Agreement, you must seek legal advice.

Drafting notes:

In this agreement, we have simplified the language as far as possible to make it user friendly for non-legally trained businesses. We have structured the agreement as follows:

  • company being the holding company of a group of companies (if there are multiple companies involved in the business)

  • company having ordinary shares and one class of preference shares  

  • reserved matters at shareholders’ level to be decided by special resolution or unanimous approval

  • reserved matters at board level to be decided with shareholder majority consent

  • simple and standard pre-emptive rights for issue of new shares and transfer of issued shares

If you need the following customisation to the document, you may need help from lawyers:

  • company having non-voting or other classes of shares 

  • different structure of reserved matters

  • specific funding obligations on shareholders

  • specific dividend or distribution provisions

  • deadlock provisions with “Texas shoot-out” exit 

  • founder share vesting by criteria other than time

Key clauses

  • proceedings of the board 

  • director nomination rights

  • option to have an executive committee in place

  • reserved matters at shareholders’ level

  • matters at board level subject to shareholder majority consent

  • pre-emptive rights on issue and transfer of shares

  • permitted transfer of shares to family relatives and wholly owned companies

  • option to have tag-along provisions 

  • option to have drag-along provisions 

  • transfer of shares in the event of death or default

  • option to have deadlock provisions (with “Russian roulette” exit)

  • option to have vesting of founders’ shares

  • option to have non-competition restrictions on founders

  • valuation of shares where transfer price refers to fair value

  • circumstances where this agreement will terminate

Document available for Hong Kong, Singapore, United Kingdom and New Zealand.

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