A shareholders' agreement is the central tool used by individual shareholder groups or all shareholders of a company to coordinate their respective interests. The aim of a shareholders' agreement is to regulate voting behavior over the entire life cycle of a company, to control the group of shareholders owning the start-up and to minimize disputes between shareholders.

In start-ups, a shareholders' agreement can make sense right from the beginning at incorporation of the company, especially if several founders contribute different forms of funding to the start-up (e.g. not all of them subscribe shares for cash). Latest upon its subscription of shares in the start-up, a professional investor will insist on a shareholders' agreement in order to be granted special preference rights in return for its large financial commitment.

Main content of a shareholders' agreement

The scope of a shareholders' agreement can be individually agreed between the shareholders. The following provisions are most common in a shareholders' agreement of a start-up:

Composition of the Board of Directors

• Should certain persons or shareholder groups be regularly represented on the board of directors, have a right of nomination to the board of directors or be allowed to attend the board meetings as observers?

Important resolutions at shareholder and board of directors level

• In addition to the qualified majorities required by law, shall further resolutions of the general meeting require a qualified majority, e.g. with a specific quorum of preference shares?
• Do certain resolutions in the board require a qualified majority, e.g. with the consent of certain directors?

Preference rights

• Do investors receive preferential treatment in the distribution of dividends and/or liquidation proceeds?

Transfer restrictions

• When are shareholders allowed to sell their shares to third parties without restrictions?
• Do shareholders have pre-emptive rights if a shareholder wishes to sell its shares to a third party ("right of first refusal")?
• Are shareholders allowed to co-sell their shares if a shareholder wants to sell its shares to a third party ("Tag Along")?
• Can shareholders be forced to sell their shares if a shareholder wishes to sell to a third party ("drag along")?
• Can shareholders force other shareholders to buy ("put option") or sell ("call option") shares of other shareholders?

Restrictions for founders

• Non-competition clauses;
• Non-solicitation clauses;
• "Good leaver" / "bad leaver" provisions (meaning rules upon which founders would be forced to sell shares or forfeit options, if they leave the company within a certain period of time or under certain circumstances) f;
• Lock-up; or
• Transfer of intellectual property rights of the founders to the start-up.

Relationship between the shareholders' agreement and statutory provisions

Certain rules of a shareholders' agreement, usually in relation to preferential rights of investors regarding dividends and/or liquidation proceeds, can also be included in the articles of association. Provisions in a shareholders' agreement only apply at the contractual level between the shareholders. If a provision is also included in the articles of association, this provision also has a corporate law component and the start-up is obliged to help implement any preferential rights. However, not all rights and obligations as agreed between shareholders on the contractual level can be implemented fully identically on the corporate level. Preferential rights in the articles of association need to be "registerable", as otherwise the commercial register will refrain from registration. On the contractual level, shareholders are very flexible due to the principle of the freedom of agreement.

One major problem in the context of a shareholders' agreement over the entire life cycle of a start-up is that initial shareholders slide further and further down the priority ranking with each subsequent financing round, as new investors want more senior preferential rights. For founders, this means not only a loss of control over the board of directors and general meeting, but also dilution of their share in the liquidation proceeds over time. At a certain point, it therefore becomes important for founders to negotiate their salary appropriately in addition to access to option packages in order to compensate for the loss of control and dilution.

Author: Pauline Pfirter

More blogs from the series:

• From Concept to Reality: A Practical Guide for Start-up Founders on In-corporating a Swiss Legal Entity (Nr. 1)
• Successfully growing a Start-up: Stages of Funding (Nr. 2)
• The shareholders' agreement in the Start-up (Nr. 3)
• Best Co-Founders Forever? Anticipating Legal and Tax Considerations for Founders of Swiss Startups (Nr. 4) - VISCHER