Starting a new business is an exciting, high-energy time. You have a great idea, a co-founder you trust, and a clear vision for the future.
But in the rush to launch, it’s easy to overlook the one document that can save your business from failure: a Shareholders’ Agreement.
While enthusiasm is vital, a dose of realism is just as important. Most new businesses face unpredictable paths. Partners who are aligned today may have different priorities, or personal circumstances, in a year.
Relying on a verbal understanding is a recipe for disaster. A formal agreement is the single best way to protect your new venture, your investment, and your relationships from day one.
What is a Shareholders’ Agreement?
A Shareholders’ Agreement is a private, legal contract between all the shareholders (founders) of a limited company.
Its purpose is to regulate your relationship as business partners and protect the company from future, high-stakes “what if” scenarios.
The Key Difference: Articles of Association vs. a Shareholders’ Agreement
This is a critical distinction that many new founders miss.
- Articles of Association: This is a public document, filed at Companies House. It sets out the basic rules for the company’s internal management (e.g., how directors are appointed). It is difficult to change and is visible to everyone, including competitors.
- Shareholders’ Agreement (SHA): This is a private and confidential contract. It is far more powerful and detailed. Because it’s a contract, it’s flexible and can cover sensitive commercial terms you would never want to make public.
Crucially, an SHA can override the Articles if there is a conflict. It is the senior document.
Why You Must Get an Agreement at the Start
From our experience, it is 1,000 times easier to get an agreement signed at the very beginning.
When the business is just an idea, its value is low, and all the founders are excited and aligned, agreeing on “what if” scenarios is a collaborative, hypothetical exercise.
Trying to put an agreement in place after the business is successful and worth millions—or worse, after a dispute has already started—is nearly impossible.
The 5 Critical Risks a Shareholders’ Agreement Solves
An SHA is your business’s “rulebook.” It provides a clear, default procedure for solving the most common (and most damaging) problems a start-up can face.
1. The “Leaver” Problem: What Happens When a Founder Leaves?
This is the most common-sense reason to have an SHA. What happens if your 50/50 partner decides to quit after 12 months?
Without an agreement, they walk away still owning 50% of your company, and you are left to do 100% of the work. An SHA protects you with:
- Leaver Provisions: Rules for what happens if a founder leaves. A “good leaver” (e.g., due to illness) may get a different share value than a “bad leaver” (e.g., quitting to join a competitor).
- Vesting Schedules: Ensures founders “earn” their shares over time (e.g., 4 years). If they leave early, the company can buy back their unvested shares, often for £1.
- Compulsory Transfers: A clear, mechanical process for a departing shareholder’s shares to be bought by the remaining partners, so you regain full control.
2. The “Valuation” Problem: How Are a Leaver’s Shares Valued?
If a partner leaves, how much are their shares worth? Without an SHA, this is the single biggest cause of deadlocked, expensive disputes.
An SHA removes the guesswork by setting out a clear valuation process in advance. For example, it can state that the company’s accountants will perform the valuation, and their decision will be final, preventing a costly court battle.
3. The “IP” Problem: Who Really Owns the Ideas
This is paramount for start-ups. If your business is built around a unique idea or piece of software, who owns it?
If a founder leaves, they might argue they are entitled to take the IP they personally developed, perhaps to start a competing company. An SHA ensures that all Intellectual Property created for the business is legally owned by the company itself, not by the individual founders.
4. The “Dispute” Problem: Solving Arguments (Deadlock)
What happens if you have two 50/50 partners and you can’t agree on a critical decision? This is called “deadlock,” and it can kill a company.
An SHA provides a tie-breaking mechanism. It can outline a clear list of “Reserved Matters” (major decisions) that require a unanimous vote, and a process for what happens if you can’t agree, such as mediation or a “buy-out” clause.
5. The “Competition” Problem: Protecting Your Business
After a founder leaves, what stops them from immediately starting a competing business and poaching your key staff and customers?
Nothing—unless you have an SHA. The agreement can include Restrictive Covenants (non-compete clauses) that prevent a departing shareholder from competing with you or soliciting your employees and clients for a reasonable period.
A “Living Document” for Your Business
As your business grows, your SHA should grow with it. It’s a “living document” that should be reviewed and updated after any significant event, such as a new round of investment or a change in your shareholding structure.
We highly recommend seeking professional legal advice when putting a Shareholders’ Agreement in place. Our Corporate Team has a wealth of experience advising founders on the documents they need to safeguard their new ventures.
Our aim is to provide comprehensive, practical, and proactive advice that you can actually understand, guiding you through the vital process of protecting your business.
Contact Our Corporate Law Team
To speak to a solicitor about a Shareholders’ Agreement, contact the Corporate Law team today on 0161 930 5151, e-mail corporateteam@gorvins.com, or complete the online form on the right and we will call you back.