Need help with your shareholders agreement?

Shareholders agreement

The relationships with your fellow shareholders and your goals for your business are unique. One shareholder might bring cash to the table, while another brings labour only. You might want an exit in five years, the other wants to toil away until retirement. These issues should be raised and agreed from the start. Writing it down in a shareholders agreement will align your interests or reveal gaps that need bridging.

Each agreement starts with a template. It is a foundation that a solicitor will build upon and guide you through. The are many different rules to pick from. Some more important than others, depending on your needs. For any rule you don’t understand, your solicitor will explain it to you. Once you understand the rules, you can select the ones that matter most. Only then can you create a shareholders agreement that’s relevant, practical and fair for your co-founders and investors.

This is not an easy task. Picking the right solicitor for the job at an affordable price is hard. At Lexoo, we do our best to make the process quicker and easier by giving you multiple quotes from specialised solicitors. We only send your enquiry to the most relevant solicitors - those with expertise and experience in dealing with shareholder interests and the rules that bind them. All our solicitors are insured and are governed by ethical standards, giving you peace of mind that your business is underpinned by a binding document crafted by a professional.

“Prior to contacting Lexoo I had spent hours unsuccessfully trawling the internet looking for the right service, but Lexoo found a suitable solicitor willing to take on this work just hours after our initial enquiry.”

- Carolyn Harry, RPC Services Ltd (Lancashire)

How much can you expect to pay?

Although prices can vary greatly, we’ve seen hundreds of enquiries for shareholders agreements come through Lexoo. The fixed-fee quotes we’ve typically seen range between £600 to £2,000. The lower-end quotes tend to cover straightforward situations where there are a small number of shareholders, each of whom have the same rights and responsibilities. The quotes at the upper end deal with more complex situations. For example: where shareholders have unequal rights or where more complex rules need to be negotiated, such as share vesting arrangements or drag along / tag along provisions.

Submitting an enquiry through Lexoo is easy. Just give us the main details, for instance:

“My co-founder and I run a fashion e-commerce business via a limited company. We are about to receive investment. We need to draft a shareholders agreement to set out the following key points:

• My co-founder and I currently own 50% of the shares each.
• The investor will take 30% of the shares for £150,000. My co-founder and I will own 35% each.
• My co-founder and my shares are to vest over 4 years (i.e. we each get 25% of our shares per year).”

(This is a fictional, but typical type of enquiry we’ve been able to help with)

What does it cover?

A shareholders agreement and the articles of association together form the rules that govern your company. Your articles deal with day-to-day company management, typically covering:

• the powers and responsibilities of directors
• the rules for different classes of shares
• how shares can be issued and transferred
• dividend procedures
• rules for shareholder and director meetings
• administrative arrangements

Although a shareholders agreement might overlap with some of the above rules, it might also cover:

• the objectives and scope of the business
• initial and ongoing funding contributions, plus other contributions like intellectual property, know-how or premises
• shareholder vesting arrangements
• how shares can be transferred or sold under different circumstances
• exit and termination rules
• rules to resolve a deadlock in decision making
• protection of minority shareholders
• non-compete, non-solicitation and confidentiality clauses and other restrictions

A shareholders agreement can also act as a master agreement for other agreements like service agreements, intellectual property licences, management agreements or distribution agreements, for example.

Some of these rules can also be written into the articles of association. But not all.

Here’s the thing:

There are strict laws regulating what your articles of association can contain. Certain rules which are common in a shareholders agreement are illegal if you put them in the articles. For example, a rule preventing you from removing an investor from the board.

Also, the articles of association are a public document, registered with Companies House and open to inspection. So anything you wish to keep private, such as an investor’s power of veto over key decisions, should be contained in your shareholders agreement.

A quick guide to shareholder agreement jargon

Shareholder agreements can be complex and the jargon can be confusing. Here are some examples and explanations to help you navigate them:

• Share Vesting
  Share vesting is a process that allows a founder or employee to ‘earn’ their shares or stock options over time (this is common in startups), or based on hitting certain milestones (this is less common).
• Buy-back
  A right for the company to buy back shares, otherwise known as a call option. For example when an employee-shareholder leaves, the company can have the right to (but doesn’t have to) buy back their shares.
• Put option
  A put option is a right to make another party buy your shares on pre-agreed terms.
• Good leaver / bad leaver
  Good leavers are generally employee-shareholders who involuntarily leave due to death, incapacity, redundancy or after a specified period of service. Bad leavers are generally those that voluntarily leave before a specified time, are dismissed or (the catch-all) are not good leavers. Bad leavers typically get way less than market value for their shares if they leave. These types of clauses are typically heavily negotiated, especially when an investor is involved.
• Drag along
  A right allowing a majority shareholder to force the remaining shareholders to accept an offer to buy the whole company, on the same terms. In other words, the leftover shareholders are "dragged along" into the deal.
• Tag along
  On the flipside, a tag along is a rule allowing minority shareholders to join in a sale by the majority shareholders i.e. they get to "tag along" with the sale by forcing a purchaser to buy their shares too, on the same terms.
• Covenants
  These are simply promises to do or provide something or to refrain from doing or providing something. You’ll often see restrictive covenants in shareholders agreements like non-compete clauses or clauses that prevent someone from poaching clients or team members when they leave.
• Pre-emption rights
  Pre-emption rights give existing shareholders a first right of refusal to take up new shares issued by the company. This means a company cannot offer shares to new investors without first offering them to the existing shareholders (on a pro rata basis) on the same terms.

Not all shareholder agreements will contain these rules, nor will they always be required. Whether any or all of these rules are relevant to you will depend on your circumstances and what you agree with your fellow shareholders and investors.

“Lexoo is a essential tool for any startup today. I used it to source a lawyer to create the Shareholder Agreements for my startup. It showed me multiple quotes within 24 hours from a range of lawyers. The quotes were much more competitive than using local firms. And the lawyer I got was more qualified than local firms were offering. I would highly recommend this service & have told my whole network about it. The lawyer I decided upon, had masses of experience right across the Startup space. Lexoo checked I was happy, all the way through, so great customer service.”

- Natasha Homer-Earley, Gujiwo.com.

Top tips when creating a shareholder agreement:

• Select a solicitor who has written shareholders agreements under similar circumstances as yours e.g. if you need vesting arrangements, make sure they’ve dealt with that before - don’t let a solicitor ‘learn on your dime’.
• If you’ve already formed a company, get them to check if your articles of association need amendment.
• Brainstorm and note down the most important considerations between you, your fellow shareholders and/or investors.
• Outline what you would expect to happen when a shareholder breaches the agreement or wants to leave or sell their shares.
• Make sure you and each shareholder fully understand the rules - there’s lots of jargon in shareholder agreements that you need to learn, but try to write in plain English and strip out any unnecessary ‘legal speak’.
• If your investor suggests you use their solicitor, politely decline and seek your own advice - your investor’s solicitor has been hired to protect their interests alone, not yours.

And finally, make sure your solicitor has professional indemnity insurance. All the solicitors on Lexoo are not only fully insured, but have been hand-picked by us to make sure you get the right expertise for your legal needs.

Looking for help with your T&Cs;? Read more here.