E-Residency company founders: you don’t want to make these 5 mistakes in your shareholders’ agreement

Starting your business in Estonia with multiple shareholders who all have their e-Residency cards is an easy and fast process. With multiple shareholders, we always recommend making a shareholders agreement. This agreement will govern how the shareholders’ ownership will be managed with regard to the company. In particular, it provides a common understanding of the company vision and solutions to how disputes and misunderstandings will be resolved in the future.

Here are some key situations when the shareholders’ agreement is especially useful: 

1. A shareholder is working less for the company than others expected and wants to leave.
2. A shareholder has run out of money and wants to take a loan or dividends from the company.
3. A shareholder wants to sell their  share.
4. A shareholder dies and will be replaced by their inheritor.

So it is crucial for shareholders to be on the same page and know exactly how to act if any of the aforementioned events should occur.

In this article, you will find out 5 mistakes to avoid when making a shareholders’ agreement.

Mistake 1. Not putting the shareholders’ agreements provisions into your article of associations 

This strengthens the agreement. The shareholders who violate the articles of association will have no voting rights. For this reason, it is advisable to put as many provisions, that you want to make public, from the shareholders’ agreement into the articles of association. It will provide additional accountability for the shareholders.

Mistake 2. We are best friends – what can go wrong? 

Have a clear plan for exits. No matter what happens to one of your partners, the changes in the share ownership should be as smooth as possible. That is the reason why you should have a clear plan in place for any exit situation. For example, when you and your partner get into a conflict and don‘t want to continue working on the same business together, how do you solve it? This situation will be especially complicated when shares are divided 50-50, the company is not sustainable, as reaching a consensus is required. One of the shareholders will have to exit to resolve this. Thanks to the shareholders’ agreement the partners will know exactly how the exit will take place.

Exiting is also a really important topic for Startup investors. Because a big part of their investment choice comes down to the startup‘s team and when a team member unexpectedly changes it is a risk to the investment. Therefore the agreement should mention the founder‘s vesting period. Typically this is a 3-4 year period when a founder has to work for the startup. If they leave sooner they will get some part or no amount from their share depending on the formal document.

The most unexpected exit from the company can be the death of a shareholder or a severe illness. Imagine having to deal with their children or wife in this situation. If you want to avoid dealing with that have a provision about it in the shareholders’ agreement. One solution is to sell the share to another partner(someone has a buying option).

Mistake 3. No mention about Tag-Along and Drag-Along Rights.

This is most critical in Startup shareholder agreements. For the sake of growth, a startup needs new investors. To protect its already existing ones there are certain protective measures. A Tag-along will protect minority investors by guaranteeing them the right to sell their shares in the company at the same time and under the same conditions as the majority shareholders and drag along right enables majority stakeholders to sell a company to a third party without the consent from minority stakeholders. So either way, a minority investor wouldn‘t be left in the startup with a majority shareholder.

Mistake 4. Too vague understanding about each others roles and responsibilities 

What kind of achievements should your partner expect from you? what do you count as enough effort? Outline what each partner is responsible for and measure it with KPI-s (key performance indicators). For example, if you are a marketing specialist in your business one of your KPI-s could be writing the monthly newsletter. If for some reason you stopped contributing to the company there would be dispute resolutions in the shareholders’ agreement about it.

Mistake 5. Drafting ambiguous provisions

Having vague rules that have too much room for interpretation can make the shareholders’ agreement useless. Key questions like profit distribution, the voting system of the shareholders and share selling conditions should all be regulated clearly.

If you feel the need for a neutral person who will consider all parties opinions objectively, foresee risks and advise you for the best outcome tailored to your companys’ needs get in contact with us and we‘ll help you make a bulletproof agreement.