Should startup founders sign a shareholders agreement (SHA)?
Yes, startup founders should sign a shareholders agreement which should include most of the following items. The shareholders agreement should be written in clear language, definitions of words should be included to avoid ambiguities and disagreements among the founders, during the life of the company.
- Capital – this section states the authorized, subscribed and paid-in capital, par-value and founder share allocations.
- Non-compete – during and for a period of time following termination of employment in the company, the resigned/terminated founder will not engage in any way with any business that provides services or products similar/competitive being produced or under development by the company.
- Vesting – Shares in startups are usually allocated upfront to founders at incorporation for a nominal value. Vesting prevents a co-founder who decides to leave or did not contribute what was expected of him from leaving a startup at an early stage with a large block of shares. When a co-founder leaves the startup for whatever reason, the startup buys back the unvested shares for a nominal value as agreed upon in the SHA.
Most founder’s shares vest over a 4 year period with a one year cliff. The SHA may also include milestones where shares may also vest.
Single or double triggers clauses may also be included for accelerated vesting of part or all of unvested shares. A single trigger could be the acquisition or a change of control of the company.
A one year cliff means, no shares vest until the founder has been with the startup for a year after which shares vest monthly.
- Intellectual Property – assignment of IP (existing IP) & Invention Assignment Agreement (for IP developed while working for the company), can be in a separate agreement.
- Funding by founders – how will the funds be treated, loan, capital etc….
- Founder Roles – description of each founders main tasks and responsibilities in the company.
- Dispute Resolution – how will disputes be resolved, arbitration, governing law.
- Company Management – management of the business and affairs of the company.
- Limitations of Transferability Rights of Shares
a. Pre-emptive: when a corporation issues new shares of stock, every shareholder has the right to purchase a portion of the issue, in proportion to their respective shareholdings in the corporation, unless the articles of incorporation provide otherwise.
b. Tag-along: when the majority shareholders sell their holdings to a third party Tag-along rights allow the minority shareholders to sell if they so desire their shares at the same price, terms, and conditions as the majority shareholders to the third party.
c. Drag-along: this is a clause that forces the minority shareholders to sell their shares to a third party should the majority shareholders sell their holdings at the same price, terms and conditions.
d. First-refusal: gives the other shareholders or the company the right but not the obligation to purchase shares that an existing shareholder proposes to sell to a third party at the same terms and conditions.
Drag-along and Tag-along rights generally terminate on public offering.
Some of the clauses of the SHA must also be included in the articles of incorporation and by-laws.
Corporation Code of the Philippines:
Section 98. Validity of restrictions on transfer of shares. – Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.
Section 100. Agreements by stockholders. –
- Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. (extract)
This is an overview of shareholder agreements between startup founders before business registration with the Philippines SEC, many other items may be included in a SHA that will allow a startup to grow while minimizing disputes between founders.
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