Has an investor agreed to come into your business? The next step is typically a shareholder agreement — the document that governs the relationship between you and the new co-owners going forward.
Short answer: A shareholder agreement (an ownership agreement between founders and investors) establishes ownership stakes, decision-making authority, how profits are distributed, and what happens if one party wants to sell their stake or the partnership stalls. It builds on the overall terms from the term sheet, but is the legally binding document.
What should a shareholder agreement include, at a minimum?
- Ownership stakes and voting rights — who decides what, and with how large a majority?
- Board composition — does the investor get a board seat?
- Veto rights — are there decisions the investor must approve (e.g. new loans, major investments, a sale)?
- Tag-along or drag-along rights in a future sale
- Right of first refusal if an owner wants to sell their stake
- Deadlock mechanism — what happens if the parties can't agree?
Why does it matter so much, even when everyone agrees now?
Most conflicts between founders and investors don't arise at signing — they arise years later, when the business does either better or worse than expected. A good shareholder agreement isn't written for the day everything goes well; it's written for the day you disagree.
Shareholder agreement vs. ordinary ownership agreement
The concept resembles the more general ownership agreement between multiple owners, but a shareholder agreement for an investment typically includes more investor-specific elements — such as preference shares, anti-dilution protection and exit rights, which aren't necessarily relevant between two ordinary co-founders without outside capital.
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