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As a startup founder, you may worry that other founders, investors, and shareholders may dilute your business interests. In addition, your decision making and voting rights may be decreasing, causing another point of concern. Although you may have legal documents outlining the relationship between you and your shareholders, other factors can influence it. Furthermore, any changes can affect your business and interests, making it essential that you can protect your legal interests. This article will outline the three main ways you can protect your interests in your startup as a startup founder.

Establish a Founders Agreement

In the initial stages of your business, you may want to establish an agreement with your fellow founders. Founders typically use a founder agreement to provide for some claw-back of founder shares if they stop working within a certain period of time or fail to contribute to the company. This is commonly referred to as founder vesting and is looked upon favourably by investors.

The matters typically included in a founder agreement can also be built into a shareholders agreement. Suppose you have a founder agreement in place, and later undergo an extensive capital raising round with external investors. In this case, the matters in your founder agreement can be built into a new shareholder agreement with those investors. For example, it may be that your shares are now fully vested, so this is no longer required).

For example, you and your co-founder agree that your shareholdings are subject to a three year vesting period. Suppose your co-founder leaves the company within three years. In that case, the company has an option to repurchase any unvested shares for the price initially paid for those shares by that founder (i.e. nil if the shares were issued on incorporation).

Have a Constitution and Shareholders Agreement

Having a shareholders agreement ensures everyone knows their rights and responsibilities. You will usually draft a shareholders agreement to interlock with your company constitution. While not mandatory, a constitution enables you to benefit from a broader range of powers than those which would otherwise apply as the default provisions under the Companies Act.

A shareholders agreement is a confidential document that regulates everyone’s behaviour and can protect your legal interests in the startup. If your startup has many shareholders, misunderstandings will inevitably arise. A shareholders agreement can resolve these misunderstandings and give shareholders certainty of where they stand in such issues.

For instance, your shareholders agreement can include terms governing:

  • dispute resolution;
  • management of the company;
  • voting rights;
  • preemptive rights on share issues and share transfers;
  • decision-making processes; and,
  • the process to manage with defaulting shareholders.

Let us imagine that you and a shareholder get into a conflict about the process of transferring shares. For example, you may think you have preemptive rights as a shareholder, and the other shareholder may not. This may threaten your interests in the business if you are worried about the shares being transferred to someone outside the company or if you would like the shares yourself. In this case, the shareholders agreement can solve such issues by clearly outlining the transfer process and if you have any preemptive rights to the shares.

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Find Investors That Fit Your Startup

When you target and attract potential investors, you must be sure you target investors whose values align with your company’s goals. If you and your investors are on the same page, you can build a solid relationship to grow your business further. Having the same goals as your investors will better protect your interests and ensure that you align regarding your business’s growth and scaling. Factors to consider include:

  • business and industry knowledge;
  • clarity on company direction – key goals;
  • investor track record;
  • ability to have discussions and arguments without tainting the relationship; and,
  • no crucial personality objections or clashes.

Apart from having the same goals for your startup, the investors you choose should also suit your business’ stage of development.

For example, if you are a brand new business, you want angel investors or crowdfunding platforms investments. Such investors will not look to control your business from the get-go, giving you space to mould your business into something you want.

However, if you are at a later funding stage, such as during growth stages, you may want to look into venture capitalists. Venture capitalists can boost your company, but they often want high levels of control in your business. Unfortunately, this may threaten your interests in the startup business, so you must be careful before deciding who to bring on board as investors. 

Key Takeaways

There are three main ways to protect your interests as a founder in your startup. You can establish a founders agreement, a shareholders agreement and find investors who will fit into your startup with aligned interests and goals.

If you need help with protecting your interests as a startup founder, our experienced startup lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

What is a founders agreement?

A founders agreement will outline the key terms that apply to founders only.

What is a shareholders agreement?

A shareholders agreement governs all the shareholders’ rights and responsibilities in your startup. It is a legally binding document that can resolve disputes and outline key issues that may arise and processes surrounding these. 

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