Shareholder’s Agreement

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by Dane Cobain Published Author, Freelance Writer, and Poet

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Definition of a Shareholder’s Agreement

The simplest definition of a shareholders’ agreement is that it’s a legally binding document that outlines the rights and obligations of a company’s shareholders. It will typically also cover the governance and issuance of shares, the way that the business operates and the way that it will make decisions based upon shareholder feedback.

Also called a stockholder’s agreement, the purpose of a shareholder’s agreement is to protect all parties, including both the company and the shareholders. It provides a legal basis against which any disputes can be arbitrated.

The Goal of a Shareholder’s Agreement

The goal of a shareholder’s agreement is to make sure that everyone is treated as fairly as possible. This includes minority shareholders, which are those with a relatively low number of shares who typically don’t have much control over the way that the company operates.

Shareholder’s agreements usually outline how shares are distributed, sold and resold, and they typically also explain the way that the company is operated and how it makes major decisions such as whether to make an acquisition or to merge with another company. Many shareholder’s agreements also specify how often board meetings take place and whether shareholders will have a say when it comes to the addition or removal of new board members and company directors.

They may also include clauses that govern what happens in specific circumstances, such as what happens to shares if one of the shareholders dies. It’s relatively common for shareholder’s agreements to specify that if a shareholder sells their shares in the future, they’re made available to existing shareholders before being issued to new investors.

Shareholder’s agreements also often include information on dividends so that investors have a written record of when they can expect to receive them. In some instances, they may include a competition clause that’s designed to stop shareholders from creating a business that competes with the company.

It can be a particularly good idea to create a shareholder’s agreement if you’re creating a company with family and friends or when taking on investment from those nearest and dearest to you. That way, any disputes can be solved by checking the shareholder’s agreement and you minimize the risks of damaging your relationships.

Shareholder’s agreements can also be useful if a company is owned by two people who each own 50%. When that happens, the shareholder agreement can specify how disputes will be resolved. Otherwise, there’s a risk that the two parties will end up at a stalemate and the company will no longer be able to operate. 

It’s one of those important admin jobs where if all goes well, you’ll never actually need it. But it’s better to have and not need a shareholder’s agreement than to not have one and then to wish that you did when everything goes wrong.

When are shareholder’s agreements created?

The best option is usually to create the shareholder’s agreement when the company is first created, because that can help potential investors to understand what they’re getting into if they agree to invest funds in the company. However, it can be delayed, as long as the company creates the agreement ahead of issuing its first shares.

Can shares be sold without a shareholder’s agreement?

They can, but it’s a bad idea. The whole purpose of a shareholder’s agreement is to help out if there’s ever a dispute or a disagreement, and so creating one before you sell your first shares will help to reduce the potential for bad blood between a company and its investors.

What do shareholder’s agreements usually include?

As well as an outline of the rights and expectations for shareholders and the way that the company is run, a shareholder’s agreement will typically include information such as how many shares have been issued, when they were issued, how much they were issued for and the ownership percentage of different major shareholders.

What is a tag-along provision?

A tag-along provision is a common provision in shareholder’s agreements that comes into play when someone offers to buy shares from a majority shareholder. If a tag-along provision is included in the shareholder’s agreement, it means that the sale can’t go ahead unless the same offer is made to all other shareholders. The goal is to make sure that minority shareholders are treated in the same way that majority shareholders are treated.

Where can I find an example shareholder’s agreement?

You can download a free sample shareholder’s agreement from LawDepot by clicking here.

Suggested mentors to help you make sense of Shareholder's Agreement

Vidya Dinamani

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