Founders Get

Confused on This
The 2 Agreements that get mistaken for the same...

AKHIL MISHRA MTLegal Team

There's one common mistake that I
have seen a lot of founders make.

Or something they don't understand

the difference between.
I am talking about the Co-Founders
Agreement and Shareholders
Agreement here.

In this post, I will help you understand

what these actually are and why they
are important to you.
I always talk about how common it is
for Founders and other stakeholders to
get into a dispute amongst themselves.

Whatever the disputes might result in,

the inception of the dispute itself is
stressful for all.
That's why there must always be some
sort of formal arrangements in place to:

(1) Anticipate these scenarios which are

way too common

(2) Avoid these cases or at least have a

solution to them when they arise
That’s where Agreements come into the
picture.

And in particular, I am talking about 2

Agreements here:

(1) Shareholders Agreement

(2) Co-Founders Agreement

These two agreements are often treated
as one and the same - and yes, broadly
speaking, they are very similar.
The purpose of both of these
agreements is to agree on different
subject matters such as:

(a) Management

(b) Equity

(c) Ownership

(d) Rights and responsibilities of

stakeholders in the Company
So let me share with you what these
agreements are.

And when you should get them to begin

with!

And why you would need them! :)

Co-Founders
Agreement vs
Shareholders
Agreement
1) Co-Founders Agreement:
As the name suggests, it is signed
between the Founders or the founding
team of the Company or business
venture.

It decides on a few important areas:

a) Equity Allocation:

It decides who owns what percentage

of the company once it's officially
formed.
b) Vesting Period:

It also mentions when each founder will

gain control over their equity.

This avoids issues of if someone decides

to leave early.
c) Dispute Resolution:

One of the main ones.

It also outlines the ways you can handle

disagreements among founders.
And this is super important for early-
stage startups because you want to
keep the core team together.

And also address what happens if

someone wants to leave.
Ideally, you should draft the Co-
Founders Agreement even before
formally incorporating the business.

Especially if you're not planning to set

up a formal business structure right
away.
2) Shareholders Agreement
The Shareholders Agreement is usually
signed when there are multiple
shareholders in the Company.
These can include Founders, or third
parties who have obtained shares from
founders, or Investors.
It focuses on two main parts:
a) Relationship Details:

It focuses on the relationship between

the shareholders, including the
investors.

And deals with matters such as Voting

Rights, Restrictions on Share transfers,
Dividend Policies, management and
governance matters, and even Dispute
Resolution.
b) Organized Management:

The goal of a shareholders agreement is

to run the business in a more organized
and professional manner.

For e.g., you don't want any random

third party coming in as a shareholder
without notice to others.
Unlike the Founders Agreement, the
Shareholders Agreement comes into
play at a mature stage.

Typically, when the investors or other

third parties join as shareholders.
The Name Does Not
Matter
With that being said, the name of the
document does not really matter.

They are quite similar.

What matters is the Content of the

Agreement, which is the clauses.
For example, an Employment
Agreement named a Service Agreement
does not make the relationship of a
Contractor between the parties.
Because the content of the agreement
mentions and shows it's an employer-
employee relationship.

And that's what's looked at in the end.

That's it!
The documents might overlap, but
that's why understanding the purpose
of forming them becomes important.

To give you a brief idea again:

(1) Founders Agreements cover your
company FROM formation to your
first equity funding round.

They are important for reducing risks

associated with the business
relationship between co-founders.
(2) Shareholders Agreements come
into effect FROM the first equity
funding round.

Basically, when you have external

investors as shareholders and replace
the Founders Agreement at that point.
I hope the difference makes more sense
now!
Let's Work Together

Looking to get either of these

Agreements?

Well, I got your back then!

DM me "Agreement Help" and I'll

handle the rest!
I'm Akhil Mishra

I am a legal professional working in

the Startup sector!

So if you found this post useful, be

sure to repost and drop a follow! :)

Comment with your thoughts too!