Shareholder agreements: five clauses founders skip

Most founders sign a shareholder agreement at the same time as everything else in a funding round, often from a template, and rarely read it again until something goes wrong. By then the clauses that matter most are the ones nobody negotiated.

Here are five provisions we often find missing or poorly drafted in founder agreements, and why each is worth an hour of attention now.

1. Vesting for founders

Investors expect founder shares to vest, usually over four years with a one-year cliff. Founders often forget to apply the same rule to each other. Without vesting, a co-founder who leaves after six months keeps their full stake, and the people who stay work to grow its value.

2. Good and bad leaver terms

Leaver provisions decide what happens to a departing founder’s shares. A good leaver, for example someone who leaves through illness, is usually paid fair value. A bad leaver, such as someone dismissed for misconduct, may receive only nominal value. Define both terms carefully. Vague definitions are the most common source of the founder disputes we see.

3. A deadlock mechanism

In a two-founder company with equal shares, there is no way to break a tie. A deadlock clause sets out what happens next: escalation to a chair, mediation, or a buy-sell mechanism under which one founder must buy or sell at a stated price. Our founder buyout case shows how costly the absence of one can be.

4. Reserved matters

List the decisions that need the consent of every founder or a specified majority, such as issuing new shares, borrowing above a threshold or selling key assets. Without that list, a majority can make changes that dilute or bind a minority founder.

5. Drag-along and tag-along rights

Drag-along rights let a majority require minority shareholders to join a sale on the same terms. Tag-along rights let minority holders join a sale the majority has negotiated. Together they make the company easier to sell and stop smaller holders being left behind.

Revisit the agreement as the company grows

An agreement written at formation rarely fits a company with investors, employees holding options and customers in several countries. Review it at every funding round and whenever a founder’s role changes. The rules differ between England and the United States, so take advice on your own structure.

This article is general information, not legal advice.