“In startups, money comes with strings - and when shareholders want out, those strings can turn into a noose.”
- Matt Glynn

Getting capital into your business is thrilling. But what happens when one of your shareholders - especially a big one - wants out? Or worse, wants out on terms that destroy your control, break your momentum, or leave you holding a poisoned cap table?

Most founders obsess over getting money in. Few stop to ask: what happens when that money wants to leave? Shareholder exits can be clean - or they can be catastrophic. Especially when the person walking out the door still owns a chunk of your company.

Legal issues like this are easy to overlook. Negotiating exits seems like a problem for “future you.” But that’s exactly how startups get blindsided - by silent investors turning hostile, by private equity pressure tactics, or by a lack of agreed exit protocols.

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.

“If there’s no agreed way for someone to leave - they’ll take the rest of you down trying.”

Managing Shareholder Exits effectively is an important stage of the start-up journey because:

◼️Exit Predictability: it provides a known, enforceable path when a shareholder wants out.

◼️Disruption Control: it protects the business from operational or reputational damage.

◼️Investor Protection: it enables new investors to enter cleanly, without legacy interference.

◼️Founder Safeguards: it helps prevent forced sales, unfair valuations, or hostile takeovers.

◼️Equity Strategy: it ensures the right people hold shares at the right time - and for the right reason.

◼️Governance Clarity: it defines who can sell shares, when, and with what approvals.

◼️Transaction Flexibility: it enables smooth M&A or fundraising by avoiding cap table landmines.

◼️Control Mechanisms: it balances majority power with minority protections.

◼️Dispute Prevention: it reduces the risk of messy legal battles during exits.

◼️Sophisticated Investor Preparedness: it protects the company from aggressive VC/PE exit tactics.

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

1. Legal Implications

◼️Uncontrolled Share Sales: shareholders may transfer shares to third parties without founder or board oversight.

◼️Litigation Traps: no exit mechanisms = higher risk of lawsuits or regulatory breaches during disputes.

◼️Contract Breaches: existing agreements may be breached if exits are mismanaged.

2. Founder Relationship Issues

◼️Control Loss: shareholder exits that aren’t managed can shift control away from founders.

◼️Valuation Conflicts: disputes over share value during exits can fracture the founder team.

◼️Board Tension: directors appointed by exiting shareholders may act against founder interests.

3. Commercial Implications

◼️Funding Disruption: messy exits signal instability and scare off future investors.

◼️Customer Distrust: a publicised or acrimonious exit can raise red flags with major clients.

◼️Strategic Drift: founder energy gets pulled into exit negotiations, not business growth.

4. Operational Implications

◼️Decision Gridlock: shareholding confusion can paralyse major strategic moves.

◼️Delayed Transactions: exits can block M&A or new investment if rights are unclear.

◼️Key Role Vacuums: departing shareholders with operational involvement may create gaps.

5. Biz Valuation Issues

◼️Exit Clauses Drive Value: buyers look for clean exits - no tag/drag confusion, no shareholder deadweight.

◼️Dilution Fallout: exits that trigger buybacks or preference rights can skew valuation.

◼️Legacy Exposure: new acquirers may demand discounts if they detect unresolved shareholder liabilities.

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.

“Plan the breakup when you’re still in the honeymoon phase.”

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. Include Pre-Emption Rights in Your Shareholder Documents

◼️Ensure existing shareholders have the first right to buy any shares being sold.

◼️Control who gets on your cap table - and who doesn’t.

2. Draft Robust Tag-Along and Drag-Along Clauses

◼️Tag-along: lets minority shareholders exit on the same terms if a majority sells.

◼️Drag-along: lets majority shareholders force others to sell in a full business exit.

◼️Balance protection and flexibility to suit your funding roadmap.

3. Include Exit Scenarios in Your Shareholders Agreement

◼️Document voluntary and involuntary exit triggers (e.g. sale, death, bankruptcy).

◼️Define valuation methodology and payment terms in advance.

4. Review VC and PE Term Sheets with Aggression in Mind

◼️Institutional investors often push exit rights heavily in their favour.

◼️Don’t accept terms that allow them to force a sale at their preferred timing or price.

5. Avoid Over-Promising on Liquidity

◼️Be transparent with early shareholders - exits may take time.

◼️Don’t imply they can cash out easily unless that’s built into your growth plan.

6. Use Buy-Back Rights and Leaver Provisions Strategically

◼️Enable the company to buy back shares in certain situations (e.g. bad leaver events).

◼️Protect the business from disengaged or disgruntled former shareholders.

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 Open Market Dump”
A startup allowed a founding investor to exit without pre-emption protections in place. The shareholder sold a 15% stake to a third party - a competitor - without informing the founders. The resulting legal battle drained six months of focus.

Case Study 2: “The VC Dictatorship”
A venture capital fund insisted on drag-along rights that let them force an exit after five years. When founders wanted to keep growing, the VC forced a sale - at a valuation below the startup’s potential. The founders lost control and upside.

Case Study 3: “The Silent Assassin”
An early angel investor was granted special veto rights on exits. Years later, during a strategic buyout, they used that right to block the sale and extract an outsized payout. The deal fell through, and the startup lost both the buyer and key staff.

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:

◼️Pre-Emption Rights: The right of existing shareholders to be offered shares before they’re sold to external parties.

◼️Tag-Along Rights: A protection for minority shareholders allowing them to sell on the same terms as the majority if the majority sells.

◼️Drag-Along Rights: A right that allows majority shareholders to force minority shareholders to sell their shares in the event of a full company exit.

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

Shareholder exits aren’t rare - they’re routine. The danger isn’t that someone wants to leave. It’s when the startup hasn’t planned how they’ll do it, or what damage they can cause on the way out.

Founders often fixate on getting capital in, but forget that every cheque comes with expectations about how and when that capital will get out.

When it’s VC or private equity money? They play hardball. They’ve done this a hundred times. You need experienced counsel who’s seen their playbook and knows how to defend against it.

GLS can help you design an exit strategy that protects your business, keeps you in control, and avoids the most common traps that crush founders just when they think they’ve won.

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.