“You wouldn’t build a house with friends mates without a contract - so why build a company without a Shareholders Agreement?”
– Matt Glynn

Founders often assume that if they agree on the basics of equity and shake hands, everything else will work itself out. It won’t.

Fail to get a proper Shareholders Agreement in place, and you’re just hoping future conflicts resolve themselves – with no rules, no structure, and no fallback plan.

A Shareholders Agreement is one of the most important legal documents your business will ever create – and not having one in place from the outset is a fast track to costly confusion, governance breakdown, and serious investor red flags.

Legal issues like this are easy to overlook. The spotlight is on launching, customer acquisition, and raising cash - not on slow, boring legal mechanics. But ignoring this step could see you building something valuable… only to lose control of it.

In this “start up stage review”, we’re going to flag up some considerations to help you better prepare to tackle this part of your start up journey – before it tackles you.

“Verbal agreements are for brunch plans - not your company’s future”

The Shareholders Agreement stage is an important stage of the start-up journey because:

◼️Control Clarity: it determines who gets to make what decisions – and how.

◼️Governance Rules: it sets out voting rights, board composition, and how decisions get passed.

◼️Equity Protections: it protects founders and early shareholders from unfair dilution or hostile takeovers.

◼️Exit Mechanics: it defines how shares are sold, transferred, or handled in a dispute.

◼️Investor Assurance: it gives investors comfort that rights and obligations are defined and enforceable.

◼️Founder Protections: it includes safeguards to stop rogue shareholders from undermining the business.

◼️Drag & Tag Rights: it protects majority and minority shareholders when exits or acquisitions occur.

◼️Pre-Emption Rights: it gives existing shareholders the chance to maintain their stake during new share issues.

◼️Dispute Resolution: it sets out clear paths for resolving shareholder disagreements.

◼️Enforceability: it ensures everyone has legally binding obligations that go beyond wishful thinking.

The consequences of not attending to this issue may include the following: 

1. Legal Implications

◼️Unenforceable Arrangements: verbal or informal agreements may carry no legal weight.

◼️No Transfer Controls: shares could be sold to third parties without your consent or knowledge.

◼️Voting Ambiguities: no legal clarity on who can vote, how much, and when.

2. Founder Relationship Issues

◼️Deadlock Dangers: equal shareholders with no dispute resolution clause = business paralysis.

◼️Misaligned Incentives: without clear share classes or performance links, resentment can fester.

◼️Power Struggles: unclear governance creates internal friction and undermines collaboration.

3. Commercial Implications

◼️Investor Concerns: most serious investors require a robust SHA - or they walk.

◼️Funding Delays: term sheet negotiations collapse when rights and obligations are unclear.

◼️Share Sale Risks: founders could be blindsided by external parties buying into the cap table.

4. Operational Implications

◼️Decision Paralysis: without clear rules on major decisions, growth can stall.

◼️Team Instability: confusion about who owns what undermines morale and retention.

◼️Poor Scalability: weak governance makes it harder to bring in future leaders or professionalise the business.

5. Biz Valuation Issues

◼️Discounted Valuation: buyers and investors will penalise unclear ownership and governance.

◼️Exit Jeopardy: M&A deals can collapse if basic shareholder mechanics aren’t in place.

◼️Dilution Disasters: without pre-emption rules, founders can find themselves rapidly sidelined.

The above lists are indicative issues – the relevance of which will depend on your circumstances, including the nature of business undertaken by your start up.

“Put the rules in place before there’s a fight over who makes the rules”

We’ve identified quite a number of potential issues that the start-up needs to consider and below are some examples of the types of steps you might want to consider taking to address these issues considered above. 

1. Draft a Shareholders Agreement

◼️Include decision-making rules, rights, responsibilities, and transfer mechanics.

◼️Tailor it to the number of shareholders, equity split, and nature of your business.

2. Define Share Classes and Rights

◼️Specify if there are different share classes (e.g., ordinary, preference).

◼️Clearly document what rights each class carries.

3. Include Pre-emption and Tag/Drag Clauses

◼️Allow current shareholders the right of first refusal before external equity is issued.

◼️Ensure mechanisms exist for majority-led exits or minority protection.

4. Incorporate Deadlock and Dispute Resolution Mechanisms

◼️Insert tie-breaker procedures or escalation paths (e.g., mediation/arbitration).

◼️Avoid operational gridlock at critical moments.

5. Align the SHA with Founders Agreement and Constitution

◼️Avoid internal contradictions across key governance documents.

◼️Ensure alignment across all key shareholder/founder instruments.

6. Keep the Agreement Updated

◼️Update after each major funding round or share issue.

◼️Ensure the agreement reflects your evolving cap table and governance needs.

The above suggestions are just a few of the steps you can consider taking.
There are many more things that need to be done to ensure the associated risks are effectively and pragmatically dealt with.

We’re not trying to be alarmists and go so far as to say that some of the legal risks we have flagged may never materialise for your business - but others can hit like a freight train.

The key point is awareness – just have a think about the issue – know that it exists and decide for yourself what you want to do.

Yes, we know you're juggling limited time, money, and human bandwidth. Sometimes ignoring a legal risk might even make sense – providing doing so is not illegal.

However, “Knowledge” has always been your greatest asset and know you have the GLS Knowledge Centre to help fill in details about the start up journey.

Let’s look at how things can go sideways:

Case Study 1: “The Surprise Share Sale”
A founder quietly sold 10% of their stake to a stranger. The startup had no SHA and no transfer restrictions. The buyer showed up to the next board meeting with voting rights. Chaos followed.

Case Study 2: “The Stalemate Startup”
Two equal shareholders disagreed on a pivot. With no dispute resolution or deadlock provisions, the company froze. Staff left, revenue tanked, and the startup folded within six months.

Case Study 3: “The Dilution Disaster”
A startup raised funds without pre-emption rights in place. Founders were diluted from 70% to 22% in a single round. No negotiation leverage remained, and they lost operational control.

As a start-up operator you may not be familiar with legal jargon. As you navigate this stage of your start-up journey - you might encounter the following legal definitions:

◼️Shareholders Agreement: A legally binding contract between a company’s shareholders that governs rights, obligations, and decision-making rules between them.

◼️Pre-emption Rights: Rights that allow existing shareholders to maintain their ownership percentage during new share issues by buying in first.

◼️Drag-Along/Tag-Along Rights: Clauses that allow majority shareholders to force minority shareholders to sell (drag) or allow minority shareholders to join a sale (tag).

Watch out for the legal jargon and refer to the knowledge hub for an extensive legal dictionary that you can access at any time:
https://www.gls-startuplaw.com/legal-ops-terminology

Your startup isn’t just a product - it’s a legal entity with real owners and real rights.
The Shareholders Agreement is what separates chaotic co-ownership from structured, investible business operations.

If you skip this document, you're not “saving time” – you're building a powder keg under your company’s foundations.

The good news? These problems are avoidable, and GLS can help you get this locked down properly – fast, cost-effectively, and in plain English.
Make this a priority before it’s too late.

GLS may well be able to help you navigate the issues associated with the Shareholders Agreement stage.
Few, if any, integrated legal solution providers have made themselves as accessible to the start-up community as we have.

Consider engaging with GLS via any of the following means:

◼️GLS Start Up Centre: visit our world-leading start-up legal support resource – we might have a solution “ready to go” available to you at a fraction of the cost – visit www.gls-startuplaw.com

◼️GLS Knowledge Hub: check out the knowledge hub for more information on this issue to learn more about what you need to do
https://www.gls-startuplaw.com/blog

◼️GLS Support Plan: consider engaging your own in-house legal team capability with a highly disruptively priced GLS Start Up Support https://www.gls-startuplaw.com/plans

◼️GLS Legal On Call™: trial GLS Legal On Call™ for free - access up to 3 free in-house legal consults and feel the power of your own “on call” legal team https://www.gls-startuplaw.com/product/gls-legal-on-call-free-trial

◼️Book A Consult: book a complimentary one-off 15 min consult via our e-calendar
https://calendly.com/globallegalsolutions/startup-free-legal-consultation?month=2025-03

◼️GLS Start Up Clinic: join our next pro bono start-up clinic for an in-person free consult – book here.