Shareholder Agreement (SHA) Template

Shareholder Agreement (SHA) Template Guide

The Shareholder Agreement is the definitive legal document that governs the relationship between founders and investors. Unlike the term sheet, the SHA is legally binding.

What is an SHA?

A Shareholder Agreement (also called Shareholders' Agreement) is a contract between the shareholders of a company that describes how the company should be operated and outlines the rights and obligations of each shareholder.

Key Sections of an SHA

#### 1. Definitions and Interpretation

This section defines all key terms used throughout the agreement. Pay close attention to definitions of:

Affiliate: Who qualifies as an affiliated entity

Fair Market Value: How it will be calculated

Ordinary Course of Business: What operations do not need investor approval

Material Adverse Effect: What constitutes a significant negative change

#### 2. Share Capital and Shareholding Pattern

Current cap table with exact shareholding percentages

Details of share classes (equity, preference, etc.)

Authorized vs. issued share capital

Securities convertible into equity

#### 3. Business of the Company

Describes the company's business activities

Any restrictions on changing the business

Key milestones or business plan commitments

#### 4. Management and Governance

Board of Directors:

Number and composition of the board

Nomination rights for each party

Quorum requirements

Frequency of board meetings

Chairman appointment and casting vote rights

Reserved Matters (Investor Consent Items):

These are decisions that require investor approval:

Issuing new shares or changing capital structure

Taking debt above a threshold

Related party transactions

Change in business plan or budget

Hiring/firing key management

Acquisitions or investments

Sale of material assets

Changing the auditor

Founder tip: Negotiate to keep operational reserved matters to a minimum. Day-to-day business decisions should not require investor approval.

#### 5. Transfer of Shares

Lock-in Period:

Founders typically have a 2-3 year lock-in where they cannot sell shares

Investors may have a 1-year lock-in

Right of First Refusal (ROFR):

Before selling to a third party, shares must be offered to existing shareholders first

Process: Notice of intent to sell, 30-day window for existing shareholders to match

Tag-Along Rights:

If a majority shareholder sells, minority shareholders can join the sale on the same terms

Protects minority shareholders from being left behind

Drag-Along Rights:

If holders of a certain percentage (usually 75%+) agree to sell, they can force remaining shareholders to sell

Ensures a clean exit is possible

#### 6. Non-Compete and Non-Solicitation

Founders agree not to start competing businesses during tenure and for 1-2 years after

No solicitation of company employees for a specified period

Geographic and sector limitations should be reasonable

#### 7. Intellectual Property

All IP created by founders for the company belongs to the company

Founders must assign any pre-existing relevant IP to the company

Employee invention assignment agreements for key employees

#### 8. Confidentiality

All parties agree to keep company information confidential

Exceptions for legal requirements, existing public information

Survival period after termination of the agreement

#### 9. Deadlock Resolution

When shareholders cannot agree on a critical decision:

Escalation to senior management or board

Mediation by a mutually agreed third party

Arbitration as a last resort

Put/call options in extreme cases

#### 10. Termination

The SHA typically terminates upon:

Mutual agreement of all parties

IPO of the company

Acquisition or merger

Winding up of the company

Important Schedules/Annexures

Schedule A: Shareholding pattern

Schedule B: Reserved matters list

Schedule C: Business plan

Schedule D: Key employees

Schedule E: Existing IP

Negotiation Tips for Founders

Always have your own lawyer review the SHA independently

Negotiate reserved matters carefully as they affect operational speed

Ensure deadlock resolution favors the company's continuity

Keep non-compete clauses narrow in scope and geography

Insist on mutual confidentiality obligations