How to draft and execute a shareholders' agreement

The most critical step in protecting your SaaS startup is to commission a specialist UK solicitor to draft a bespoke Shareholders’ Agreement as soon as you have more than one founder. While the standard Articles of Association are public and generic, a Shareholders’ Agreement is a private contract that provides a safety net for your professional relationship, ensuring that if a founder leaves or a dispute arises, the business can continue to operate without legal gridlock.

Why you need more than standard rules

When you register a company in the UK, you are governed by the Companies Act 2006 and your Articles of Association. However, these are often basic and do not account for the specific needs of a software startup. A Shareholders’ Agreement allows you to keep sensitive business arrangements private and gives you much more control over the internal mechanics of your company.

Key clauses to include

Your solicitor should help you tailor the agreement to your specific needs, but most SaaS startups should prioritise the following areas:

• Share Vesting: This is arguably the most important clause for founders. It ensures that co-founders 'earn' their shares over time (e.g., over four years). If a founder leaves after six months, the agreement allows the company to buy back their unvested shares, preventing a 'dead weight' shareholder from owning a huge chunk of your equity.
• Good Leaver / Bad Leaver Provisions: These define what happens to shares when someone leaves. A 'Good Leaver' (someone leaving due to illness or redundancy) might get a fair price for their shares, while a 'Bad Leaver' (someone who leaves to join a competitor or is fired for gross misconduct) may be forced to sell their shares back at a nominal price.
• Decision-Making and Veto Rights: You can specify that certain 'reserved matters' (like taking on debt or selling the company) require a higher majority—such as 75% or even 100%—regardless of who holds the most shares.
• Drag-along and Tag-along Rights: Drag-along rights allow a majority of shareholders to force the minority to join in the sale of the company, preventing a small shareholder from blocking a lucrative exit. Tag-along rights protect minority shareholders by ensuring they are included in any sale on the same terms as the majority.

The steps to execution

1. Agree the 'Heads of Terms': Sit down with your co-founders and have the difficult conversations now. Discuss vesting periods, what constitutes a 'bad leaver', and who has the final say on product direction.
2. Appoint a Startup Solicitor: Choose a legal professional who understands the tech space. Using a generic high-street solicitor may result in a document that is too rigid for a fast-growing SaaS business.
3. Review the Draft: Your solicitor will produce a draft based on your discussions. Review it carefully to ensure it reflects your intentions and doesn't create unnecessary red tape for daily operations.
4. Execute as a Deed: For the agreement to be most robust under English law, it is often executed as a Deed. This involves all shareholders signing the document in the presence of an independent witness.

Top Tip: Don't wait for 'the right time' to do this. It is significantly easier and cheaper to agree on these terms while everyone is on good terms and the company has a low valuation than it is when there is money on the table or a relationship has soured.