What founders should consider before signing a shareholder agreement

Does a startup need a shareholder agreement if the founders trust each other?

Yes, because the agreement is written for the moments when trust is tested, not for the good years. Founders rarely disagree about anything when the company has no revenue and no outside money. Disagreements tend to start later, when one founder wants to leave, an acquirer makes an offer or the company needs to raise on terms not everyone likes.

By then each owner has more at stake and less reason to compromise. Settling the hard questions early, while everyone is aligned, is usually faster and cheaper than settling them in the middle of a dispute. The agreement also gives future investors, lenders and buyers a clear picture of how the company is governed, which shortens their review.

What happens if there is no shareholder agreement?

Without an agreement, the company's charter, bylaws and the corporate statute of its state of incorporation decide most questions between owners. For an Illinois corporation that is the Business Corporation Act of 1983. For a Delaware corporation it is the Delaware General Corporation Law. An LLC is governed by its operating agreement and, where that is silent, by the state LLC statute, such as the Illinois Limited Liability Company Act.

These default rules are general. They often say little about what happens to a departing founder's shares, whether an owner can sell to a competitor or how a 50/50 split is resolved. Where the statute is silent, owners may be left with expensive options such as litigation or, in serious cases, a court-supervised remedy. State law varies, so the gaps depend on where the company is formed.

Which terms in a shareholder agreement matter most?

The terms that matter most are the ones that control decisions, exits and transfers, more than the ownership split itself. Founders often spend most of their negotiating time on percentages. In practice, the provisions below decide how much those percentages are worth when something changes. Read each one with a specific scenario in mind, such as a founder leaving in year two or an offer arriving before the next round, and check that the agreement gives an answer you would accept.

• Reserved matters: which decisions need unanimous or supermajority approval
• Transfer restrictions: rights of first refusal, consent requirements and permitted transferees
• Leaver provisions: vesting, repurchase rights and how departing shares are valued
• Deadlock: the process for resolving an even split on a key decision
• Drag-along and tag-along rights on a sale of the company
• Information rights and restrictions on competing with the company

What happens to a founder's shares if they leave the company?

That depends entirely on the leaver and vesting terms, which is why they deserve the closest reading. A common structure is time-based vesting, often over four years with a one-year cliff, combined with a company right to repurchase unvested shares at cost when a founder leaves.

Some agreements also treat a founder who leaves for cause differently from one who leaves for health or family reasons. Check how cause is defined, who decides whether it applies and how vested shares are valued if the company buys them back. Where founder shares are subject to vesting, the tax position matters too. A section 83(b) election under the Internal Revenue Code must be filed within 30 days of the share transfer, and the deadline cannot be extended, so speak to a tax adviser at the time shares are issued.

How do founders break a deadlock?

Founders break a deadlock through whatever mechanism the agreement sets out in advance, and if there is none, the company may simply stall. Deadlock is most likely where two founders or two groups each hold half the votes or half the board seats.

Common mechanisms include escalating the issue to a cooling-off period and structured discussion, appointing an independent director or chair with a casting vote, mediation, or a buy-sell clause where one owner names a price and the other must either buy or sell at it. Each approach has trade-offs. A buy-sell clause can favor the owner with easier access to cash, while an independent director requires finding someone both sides trust. The right choice depends on the founders' relationship and financial positions.

Will investors require changes to our shareholder agreement?

Usually yes, because institutional investors typically ask for their own governance, information and transfer rights at the first priced round. In many venture financings these sit in a separate set of documents, often a voting agreement, an investors' rights agreement and a right of first refusal and co-sale agreement, which may replace or override the founders' earlier arrangement.

An agreement that conflicts with standard investment terms has to be renegotiated, and that can be slow if founders have since fallen out or one has left. Drafting with the next round in mind, and including a clear amendment mechanism that does not need every holder's signature, keeps that work short. It also helps to ask early investors and advisers which terms they would expect to change, so the founders are not surprised at the term sheet stage.

Should each founder get their own lawyer?

Each founder benefits from understanding the agreement independently, and separate advice is worth considering where roles, contributions or financial positions differ. Company counsel represents the company, not any individual owner, even when the founders are the only people giving instructions.

A founder contributing intellectual property, a founder working without salary and a founder investing cash may each want different protections. Separate advice does not have to be adversarial or slow. Often it is a focused review of the leaver, transfer and deadlock terms, which are the provisions most likely to affect a founder personally. Taking that advice before signing is usually far simpler than revisiting the agreement later, when the founders' interests have already moved apart and any change needs everyone's consent.

From our practice

In our work, we often see founders sign a shareholder agreement adapted from a template, with ownership percentages carefully negotiated and leaver terms left almost untouched. The issue tends to surface years later, when a co-founder steps back and the agreement either says nothing about their shares or prices them in a way no one remembers agreeing to. Reading those clauses closely at the start is usually the simplest protection available.