Shareholders Agreement: Fill & Download for Free

This is a situation where it is absolutely insane to attempt this yourself. It is so inexpensive to get a real lawyer to do this for you, and the consequences of not doing it right are so serious, that it’s like attempting to build an airplane in your back yard from scratch because you don't want to spend $445 on commercial plane ticket to fly to Europe.I’ve got an MBA, have taken courses at Columbia Law School, have 40 years experience in startups, and have written a New York Times best selling book on the subject (The Startup Checklist)…and I wouldn't dream of trying this myself.Speak with a startup lawyer!

From this month’s issue of Boards & Directors magazine:Startup Boards by David S. RoseAuthor of the NYT best seller, The Startup ChecklistThe Board of Directors of ExxonMobile Corporation includes the CEOs of Xerox, Travelers, Merck and Caterpillar, and the former CEOs of IBM, Nestlé, Pepsi and Johnson & Johnson. In contrast, the Board of Directors of a new startup might consist solely of its founder: a 20-something first-time entrepreneur. Both serve the same purpose, which is to represent the rights and viewpoints of shareholders.A company’s board of directors is elected by the company’s shareholders, so before a startup receives outside funding, the board is “elected” by—and usually consists of—the founders (although for a tiny company with one or two founders, “the board” may exist in name only).​Once a company receives its initial funding, there are now other owners of the company in addition to the founders. Where it gets tricky is that all of a company’s shareholders can voluntarily agree to sign a Shareholders Agreement in which they all agree to cast their votes in a certain way.So for a startup company that has taken in an investment from angel investors or venture capitalists, the Shareholders Agreement might provide that the company will have a board of directors consisting of three people, and, regardless of how many shares anyone has, everyone agrees to vote for one director nominated by the company’s founders, one director nominated by the investors, and one “outside” director that everyone can agree on. So in this case, even though the founder still owns 80% of the company, the investors have an equal voice when it comes to control.​In a larger startup, perhaps after one or two investment rounds have taken place, the board might be expanded to five people, with two directors chosen by the common stock holders (the founders), two by the investors (for example, by the directors of venture capital funds that might have invested in the business, or by the most important angel investor, if any), and one independent director agreed to by everyone.​If, at this point, the company has a non-founder CEO, that position might get a board seat (with one for the founders). And if there’s only one major investor, they may choose to fill one of their two seats with an industry expert.​But typically, the common seats will be filled by the founder(s); the investor seats by the lead angel (for an angel deal) or the venture capital partner and/or an associate (for a venture-led deal); and the independent seat(s) by someone experienced and knowledgeable, and who is acceptable to all parties.There is a saying in the not-for-profit world that board members should be able to deliver one or more of the following: wealth, work, or wisdom. In my experience, those same qualities also apply to the directors of for-profit startups:​Wealth—as in investors who can write checks and help with fundraising in future rounds;​Work—as in directors with specific skills who can be helpful in recruiting, business development, customer introductions, exit analyses, and so on; and finally,​Wisdom—in the form of smart, experienced mentors who can provide sage advice to the CEO from an objective perspective.​In an ideal world, all board members would be able to contribute in all three areas. In the real world, however, one hopes for the best, but settles for the best they can get. This can be challenging for a new startup, because getting one or more great people to voluntarily give of their precious time is often a tall order.When it comes to compensation, it is unheard of for any board members of pre-profitable startups to receive cash salaries or stipends. But while founders, company employees, and representatives of venture capital funds typically receive no compensation for their board service, it is not unusual for outside directors—such as an independent director jointly selected by the founders and investors—to receive stock options (in the range of 0.5% to 2%), typically vesting over two to four years.The edge case is when an angel investor occupies a board seat. There are no hard and fast rules, but typically, if the angel is the primary investor in the round and already has a significant equity stake, there would not be an additional amount allocated for board service. If, on the other hand, the angel only has a small bit of equity, and is on the board representing a larger group of investors, then they might be treated like an independent director, with a point or two of options on a vesting schedule.Sidebar: Ten Startup Board Tips​▪ The CEO and the largest investor should both have seats on the board.▪ Set up a regular schedule for board meetings, four to six per year.▪ Send a full briefing package to all board members several days in advance.▪ Have a standard agenda, distributed in advance and followed firmly.▪ Review Key Performance Indicators, but always save time for discussion.▪ The meeting should be run by the chairman of the board.▪ Votes should almost always be unanimous. If not, that’s a big red flag.▪ The end of each meeting should be an executive session without the CEO.▪ Minutes should include only the names of attendees and actions taken.▪ Draft board minutes should be distributed to all members for review.

Start with why you are already sure you want to be a Delaware C corporation before you have even spoken with your attorney. Then, you need to know what you want to call it (and a couple of alternatives), what the purpose of the corporation will be, where you will actually be doing business (because you will have to register your corporation in the state or states where business will be conducted), who will be the original shareholders, directors and officers - names and addresses. Along with the names, it would be even better to have all the respective roles of the shareholders and management worked out so your attorney can prepare a shareholder agreement. At my firm we have a whole checklist worked out to reduce this to the least number of steps and offer it for free if you are interested.