Shareholders' agreement for a UK startup: the clauses investors expect

A company has articles of association by law. They are filed at Companies House, bind everyone who holds shares, and can be changed by a 75 per cent vote. A shareholders' agreement is a private contract between the shareholders and usually the company. It can do three things the articles cannot do well: impose personal promises on named founders (to work full time, not to compete, to keep confidences), give a particular investor rights that other shareholders do not have, and stay private.

In a seed round the two documents work together: the investor-ready articles carry the share rights, pre-emption and the leaver mechanics that need to bind future shareholders automatically; the shareholders' agreement carries consent rights, information rights, warranties and the founder covenants.

The list of things the board or the founders cannot do without the investors' consent. A reasonable seed-stage list: issuing shares or options outside the agreed pool, borrowing above a threshold, selling or licensing the main assets, changing the business, altering the articles, paying dividends, appointing or removing directors, approving the annual budget, entering transactions with founders or their connected persons. A long list turns the investor into a second management team; a short list makes the investment unprotected. Twelve to twenty items is normal.

Monthly management accounts within a set number of days, annual audited or unaudited accounts, an annual budget before the year starts, and notice of anything material (litigation, a key customer leaving, a regulatory letter). A lead investor often takes a board seat or an observer seat; the agreement says how many directors there are, who appoints them, and what the quorum is so that a meeting cannot proceed without the investor director.

Pre-emption on new shares gives existing shareholders the right to take up their share of any new issue before outsiders, so they are not diluted without the chance to follow their money. Pre-emption on transfers gives them first refusal when a shareholder wants to sell. Both normally sit in the articles with carve-outs for option grants and the next funding round.

Drag-along lets holders of a majority (often investor majority plus founder majority) require everyone to sell on an exit the majority has accepted, so one small holder cannot block a sale. Tag-along is the mirror: if the majority sells, the minority may join on the same terms. Investors insist on both; founders should check the drag threshold and that the price and terms must be the same for all.

Investors expect founders' shares to be subject to vesting (if they were not already), usually four years with a cliff, with good and bad leaver definitions deciding what a departing founder keeps and at what price. If the founders have a founders' agreement already, those terms usually carry across, sometimes with the clock reset. Read the bad leaver definition carefully: "resigning" as bad leaver for the whole vesting period is a hard term.

The founders and the company warrant that the facts the investor relied on are true: the cap table, ownership of the IP, no litigation, accounts fairly stated, key contracts disclosed. Anything that is not true goes in a disclosure letter before signing. Liability is capped, usually at the amount invested for the company and a much lower figure for founders personally, with a time limit for claims. Do not sign warranties you have not read line by line; the disclosure letter is where you protect yourself.

Full time and attention to the business, confidentiality, an assignment of IP to the company, non-compete and non-solicit for a period after leaving. Keep the restrictions no wider than the business the company actually does, or they may not be enforceable at all.

A seed-stage shareholders' agreement has a known shape. Starting from a template that already has that shape, and spending the negotiation on the five numbers that matter (consent list, drag threshold, leaver terms, warranty cap, board composition), is faster and cheaper than redlining a document from the investor's lawyers you have never seen before. The investor-round shareholders' agreement is £149, or part of the Seed round pack at £299. For a round above a few hundred thousand pounds, have the finished set reviewed for a fixed fee before signature.