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Shareholders’ agreement and clauses of the founders

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Shareholders’s agreement and clauses of the founders

Shareholders’ agreement and clauses of the founders

With reference to the shareholders’ agreement and the clauses of the founders, we will analyse together the main clauses of a vital document for the proper functioning of commercial companies.

The shareholders’ agreement, which, as the reader already knows, regulates the relationship between shareholders and the company, establishing conditions for shareholders’ entry, rules of operation within the company, and shareholders’ exit.

We will start by analyzing and assessing two clauses of particular relevance to the founders: one related to their permanence and dedication, and the other being the prohibition of the sale of their shares or the lock-up period.

Clauses of permanence and dedication

The first clause refers to the commitment, typically of the founding shareholders to the company, as especially in the case of startups or newly established companies, the founders are among the most valuable assets of the new company.

The company’s valuation often relies heavily on the growth expectations of the project. The founders play a crucial role in the corporate project, as their combination of talent, industry experience, and energy can significantly influence an investor’s decision to invest in the company.

Therefore, these clauses usually establish a specific period during which the founding shareholders or key personnel commit to providing certain services to the company.

This commitment often includes defining the duration of dedication and incompatibility rules, typically related to activities that may conflict with the company’s interests.

In some cases, a total incompatibility is included. In such situations, it is essential to establish exceptions, especially regarding participation in conferences or other activities not directly competing with the company, which may even benefit the company itself.

Clauses of lock-up period

On the other hand, the lock-up period clause is designed to prevent shareholders from selling their shares or securities during a specific period, usually coinciding with the time when the company is expected to achieve maturity and could theoretically continue to operate successfully without the contributions of the founding shareholders.

In most cases, this clause will simply state the impossibility of transferring shares. However, it could be beneficial to build a relationship of trust between the founding shareholders and the investors by adding a safeguard to this clause.

For instance, this safeguard may allow the transfer of a small percentage of shares in cases of need or when the affected shareholder requests a negotiated exit from the company due to health reasons.

These clauses should be accompanied by penalties for non-compliance, as such breaches are often considered a serious violation of the terms of the shareholders’ agreement.

This could result in the mandatory sale of shares through a buy-sell obligation and a cross-sale option in favor of other shareholders and/or the company, who will acquire the shares of the non-complying shareholder at an agreed valuation.

In any case, it should be noted that for a sale obligation to be valid, the procedure, execution period, and transfer value must be specified, and it may even be subject to the assessment of an independent third party.

The key is for founding shareholders not to perceive these clauses as mere impositions lacking purpose, and for investor shareholders not to view them as inflexible constraints with no room for negotiation.

Instead, both parties should approach them with the intention of understanding that their purpose is to ensure the stability and development of the company by “safeguarding” one of its most critical assets – its creators.

At Letslaw, we specialize in corporate law, and we would be delighted to advise and support you with any corporate or commercial inquiries. Get to know us and contact us at the following link.

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