Background
The client is a technology startup, founded by three co-founders.Each co-founder held an equal share of the company (33.33%) and initially agreed informally on their roles and responsibilities. However, they did not draft a Shareholders’ Agreement when forming the startup. Based on an informal understanding between the founders, Founder A was responsible for product development. Founder B was the chief technology officer and Founder C acted as the Chief Executive Officer.
The Problem
The start-up was able to close a SAFE round in year 1. However, as the startup began to grow and attract more investors, several challenges arose. Amongst others, the co-founders disagreed on whether to pivot start-up’s business model from a SaaS product to a marketplace platform. Also, one of the founders started dedicating less time to the start-up due to personal reasons, causing resentment among the other due two founders who were working full time. A venture capital firm expressed interest in investing in the start-up, but the occassional disputes between founders proved attractive to investor. Founder A also expressed interest to relocate to Canada to take a paid job having secured a Permanent Residence visa in Canada.
Our Approach
We interviewed all the founders with a view to understanding the concerns of each founder as well gauging their long term interest in the start-up. We drafted a suite of shareholder and leaver agreements, which amongst others clearly defined the roles and responsibilities of the founders, defining the conditions for staying and marking such conditions to key performance indicators agreed to by all the founders. The Agreements also included multiple voting structures, allowing each founder to take a veto on areas of competence. We included provisions to adjust each founder’s shareholding if a shareholder significantly reduced their contributions or failed to meet agreed milestones. We also documented a right of first refusal to oblige a selling founder to offer their shares, the other co-founders based on a valuation mechanism agreed to by all founders. We also documented a number of investor protections, including pre-emptive rights, ensuring existing shareholders could participate in future funding rounds to maintain their ownership percentage. We facilitated the exit of Founder and helped the start-up to secure its first round of equity financing.
Conclusion
This case demonstrates the critical role of a Shareholders’ Agreement in mitigating risks, fostering collaboration, and ensuring the long-term success of a startup. For tech startups, a well-drafted agreement is essential to manage relationships, attract investors, and provide a clear framework for handling disputes and unforeseen circumstances.
