Shareholders' Agreement with Vesting Schedule
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When you start a company with more than one shareholder, investing in a Shareholders’ Agreement is without a doubt, one of the best decisions you’ll ever make. The reality is, co-founders are only people. People are very different, in their ways of working, their visions, their willingness to change direction, their talent at selling their product and their ability to get stuff done. They also go on to have families, divorce their partners and decide to travel around the world. Shareholder relationships are like every other human relationship and that means, they change. A Shareholder’s Agreement will help protect your company from being forced to change too.
A Shareholder’s Agreement can also regulate when each shareholder gets their shares (vesting schedule), whether there’s a grace period before any shares vest (cliff) and what happens if one of the shareholders doesn’t deliver what they promised.
It also regulates how the company is managed and controls when and how shares are transferred to prevent a scenario where the investor of your dreams comes along and a shareholder refuses to sell or dilute their shares. It also protects you in the event a shareholder wants to leave so that you have a right to buy their shares first before they offer them to someone else.
A Shareholders’ Agreement can also provide a mechanism whereby a person’s shareholding is linked to their employment (e.g. their Directorship), so that if they were to leave they must offer their shares up for sale. It can also include different valuation mechanisms depending on the circumstances under which the relationship with the company comes to an end so if the leaving shareholder is a ‘bad leaver’ (i.e. they leave under bad circumstances) then you only pay a nominal price for their shares.
Finally, if you’re going for investment, an investor will often want to see that you have your “house in order” and that you have documentation in place that regulates the relationship between you and your co-founder (even if they want you sign another shareholders’ agreement once they’ve invested in your company).
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