In the vast majority of cases, a company or start-up drafting a shareholder agreement will opt to include additional clauses. These clauses are designed to tease out specific plans or eventualities the company may examine going forward. A draft shareholder agreement will, as standard, govern the immediate concerns of the business and how the current shareholders interact with each other on an on-going basis. Below we have examined 10 additional clauses to Include in a shareholder agreement and why they may be useful to your company.
1. Drag and Tag Rights
When it comes to selling a business, there are a wide variety of options that can be included in a draft shareholder agreement. In most cases, basic rules for selling shares to another shareholder will be included as standard in an agreement. Drag and tag rights cover when a purchasing company comes in to acquire a majority stake in a business, say 70%. Once a certain threshold is reached, this clause can make sure that the purchasing company must also obtain the minority shareholding, e.g. the other 30%. Drag and tag can also apply to your company purchasing a new entity, indicating that all shareholders would support the investment in a certain way.
2. Non-Financial Equity
It is very common for a start-up to include some kind of non-financial reward in the form of shares for directors, employees or current shareholders as part of their structure. A draft shareholders agreement can include details with regards to how and when these shares are gifted in a business. In most cases, a start-up will set performance-based targets or goals and rather than rewarding staff or others in the business with money, further shares are issued. These shares can have a range of conditions attached to ensure it does not alter the primary voting powers of the company and all of this can be added on to your shareholder agreement.
3. Share Vesting
Similar to the above, share vesting is used to issue shares to people directly involved in the business as a reward or payment not in cash. A start-up or small business shareholder agreement can include provisions for shares to be issued over a set period of time. Unlike non-financial equity, share vesting gives an employee or director a guarantee that these shares will be issued over time. In many cases, this process is used to hire highly skilled employees to a business with the aim of providing a better payment package.
4. Good and Bad Leavers
When a company talks about good and bad leavers it refers to the terms of how a shareholder leaves a company. Many small business shareholder agreements will want to include provision for if a shareholder decides to sell, move on or is forced to leave an entity for whatever reason. The purpose for this is to have a set of rules that in a draft shareholders agreement to allow for a smooth transition that will not impact the growth of the business. Good and bad leavers clauses can apply to any reason why a shareholder leaves a company and as a result, would sell their shares in the entity.
5. Pre-emptive share rights
Pre-emptive share rights fall under when companies are receiving further investment in their business. A start-up or small business shareholder agreement can include provision should the company bring in new shareholders. In many cases, these new shareholders may be investing more cash into a business than founding members did but not receiving the same amount of equity or voting rights. A pre-emptive share rights clause gives shareholders the option to draw down more ordinary shares to maintain a balance in the amount of votes each shareholder has. These shares are issued at an agreed value in all cases.
6. Anti-Dilution Share Issue
Similar to the above, anti-dilution share issues are an enforced or automatic issue of shares to prevent a shareholding from becoming unbalanced and founding members being crowded out when it comes to control of the business. With this mechanism, the share issue to existing shareholders must occur at the same time as new investors come on board and is drafted with large share numbers in mind. Unlike the pre-emptive option, anti-dilution share issues carry no consideration and funding is not expected to be gathered.
7. Rights to Appoint Directors
As standard in a start-up company, a majority shareholder who holds more than 50% of the shareholding in the company has the right to appoint or remove directors from the board. In many practical cases, however, this power may be extended to some minority shareholders. Under the conditions or structure a company may have in place, some shareholders with a smaller holding may retain the right to make certain changes to the day-to-day running of the company and appointment of directors can come under this.
8. Restricted Activities
On the opposing side of the above, restricted activities can be found. A clause like this can be put in place to regulate the powers of a shareholder outside of the typical company setup. For example, a shareholder can be prevented from conducting a restricted activity without what would be called a super majority or more than 75% of the current shareholding of the business. This is typically deployed where a large number of disparate shareholders exist.
9. Liquidation Preference
Within a company constitution, basic instruction can be designated as to if a shareholder receives liquidation preference or not when winding-up or closing a company. Within the shareholder agreement this element can be further teased out, applying conditions to the fact, detailing percentages or specific elements. For example, a minority shareholder in a start-up that owns a certain part of the IP or intellectual property could be designated that element back as part of a liquidation preference.
10. Debt and Equity Capital
The option of placing a debt and equity capital clause in a shareholder agreement can be key for a start-up company. In a large amount of cases, a company will obtain funding internally from the shareholders of the business in the form of investment or loans to the company. The debt and equity clause can provide a wide range of options that cover how investment like this is treated. This can include; when a loan should be repaid, can it be converted into shares in the business or what happens to a loan or investment if the company is being closed down.
The above additional clauses to include in a shareholder agreement can be added to the standard format to further secure and structure your business for the future. ShareholderAgreements.ie can assist you with should you wish to discuss any aspect of the above or any of our services. Please feel free to complete our contact form or call the team directly on 01-2405277.