How to Navigate Your Startup When Surrounded by Piranhas — The Shareholder Agreement explained for entrepreneurs
Over the last 6 years I’ve talked with around 50+ entrepreneurs about Shareholder Agreements and I noticed it always led to discussions and they are often misunderstood. So in the upcoming series I shine some light over the Shareholder Agreement (SHA); the terms used by investors. Why they are important for the investor and what the consequences are for you, the founder.
As you might know at Holland Startup we build startups and guide entrepreneurs in their entrepreneurial journey on a daily basis. Every quarter new entrepreneurs join our community of company builders to start their journey to become startup founder and succeed.
As a founder you encounter different investors, some founder friendly, some not. The Piranhas! Piranhas are only in it for the money! They lure founders by offering a great term sheet as they know the real deal is the Shareholder Agreement. That’s where the (money) magic happens. That’s where they take control and the fruits of your labor.
Although I don’t believe we — as a company builder and investor — are piranhas, we too need to make a return on our equity. So at Holland Startup we use a standardized Shareholder Agreement written by our partners at LXA Startup Lawyers. With which we try to be as founder friendly as possible.
The main topics
To start at the ground level: a Shareholders Agreement (SHA) is an agreement among shareholders. It governs the way shareholders treat each other, how they align the management of the company to their interest, and how to govern the company they own.
In general, the Shareholder Agreement is about two main topics:
- How to Control a Startup and its Management, and
- How to Share Proceeds, if any.
Control
At Holland Startup the companies are still young which makes it highly important to set up things wisely. Therefore we, as a company builder, take a hands on approach and counsel our startups on a near day to day basis. This makes there’s no need for a board structure yet. The day-to-day operation lies with the management of the company (minimal two (2) co-founders) and the decisions that really influence the value of the company are made by the shareholders in a General Meeting. Boards are formed at — or just past — the Seed round.
General Meeting
General Meeting means the general meeting of shareholders (algemene vergadering van aandeelhouders) of the Company. This is the ultimate governance body. They own Shares in the capital of the Company. In a normal setup, decision making within a General Meeting will be based on a simple majority (more than 50%). You will read something like:
Control means (a) direct or indirect ownership of more than fifty percent (50%) of the nominal value of the issued share capital of a corporate or legal person, (b) more than fifty percent (50%) of the voting power at general meetings of a corporate or legal person, or © the power to appoint a majority of the directors of a corporate or legal person;
When investors are involved who own a minority (<50%) share, they would like to have some protective measures. Holland Startup owns 25% of the capital of the company. When it comes to voting Holland Startup has no Control, meaning the founders can make any decision they like. To counterbalance this, we use a Qualified Majority for very specific decisions (the Reserved Matters) that really influence the valuation of the company:
Qualified Majority means the affirmative vote of Shareholders representing at least 51% of the Shares, including the affirmative vote of the Builder;
The Entrepreneurs perspective
Now what does this mean for entrepreneurs? Most of the venture backed entrepreneurs understand they need to give in some control. At the end companies are not built only by the founders. It is the social, human and financial capital that supports the success of the company and its founders.
Only a small amount of matters (25 points) that are really material to the company and its shareholders is excluded from normal voting procedures. Some of these matters include: being a party to legal proceedings, changing the accounting policies or valuation methods of the Company, an issue of shares or other securities and the granting of rights or options to acquire shares or other securities. The article Reserved Matters only points towards this list in the back of the agreement:
Reserved Matters
To the extent permitted by law, the Shareholders and the Directors shall exercise all voting rights and other powers of control available to them in relation to the Company and the Subsidiaries (whether as a shareholder, a director or otherwise) to procure that the Company and the Subsidiaries shall refrain from taking any of the (legal) actions listed in Schedule E without the prior approval of the Qualified Majority.
You should know; since Holland Startup is a minority shareholder without control we can’t force decisions on you as an entrepreneur. It is an inside-out structure. The management board (your team) is responsible for the creation and the execution of the Plan. Shareholders can only agree or disagree with the proposed plan or abstain from voting.
The Entrepreneurs Perspective
After reading the list of reserved matters an entrepreneur understands the meaning and how it can come into practice. This list can be adapted from time to time and reflects the current phase the company is in.
The points discussed above will give you a clearer understanding of how investors and the company cooperate and how this cooperation is set up and recorded.
To get an even deeper understanding of the SHA and its effects, please read the follow up articles: part 2, part 3, and part 4.
