Introduction
While establishing an organization it is important to set out the foundation, clearly envision the mission and formulate certain ground rules between the parties who are starting the venture. The simple way is to draft an agreement which lays down all these essential aspects related to the organization and state the rights of the parties involved. However, if you are still deciding how to go about it, understanding the difference between the Cofounders’ Agreement and Shareholders’ Agreement (also known as SHA) should set some perspective.
Cofounders’ Agreement:
As the name suggests, it is the agreement entered between two more parties who intend to start an organization (“Business Venture”) together and are yet at the ideating stage. The importance of this agreement is to set the goals, vision and mission of the organization. As it is quite possible that creative minds tend to come up with innovative steps to improve their objective, it is important to clearly lay out the initial objective and final goal/s for the organization.
The major aspects covered in this agreement are:
- The current status of the Business Venture and the associated rights and obligations of the parties with respect to the ownership, management (including the division of expenses) and control of the Business Venture;
- To set out the roles and responsibilities of each of the parties and their contribution (financial and intellectual) towards the Business Venture;
- To set out how the decisions related to the Business Venture will be taken till the formation of the registered organization;
- It helps to set the initial capital contribution, the utilisation of these funds, and ways of raising investment for setting up the registered organization;
- Most importantly, it helps to clearly set out the minimum requirements for setting up and the consequences in case the said requirements are not met by either/both parties.
Shareholders’ Agreement:
This agreement is executed once the organisation is registered and the parties want to establish the responsibilities of the shareholders along with the company. Therefore, the company too is a party to this agreement.
This agreement clearly sets out the shareholding pattern of the organisation to secure the shareholding of the promoters (the initiators of the organisation). It aims to establish the methods of raising future investments and most importantly, the method of transfer or sale of shares of the current shareholders.
The major aspects covered in this agreement are:
- The restrictions on transfer of shares and the position of permitted transferees;
- It mentions the rights of the shareholder for executing the transfer or sale of their shares such as, Right of First Refusal (“ROFR”), Tag Along Rights, etc;
- Along with this, it clearly states the mode for making further issuances of shares for raising capital;
- Additionally, it also sets out the conditions to exit and its consequences.
It is important to note that the Shareholders’ Agreement should be in line with the charter documents of the organisation i.e., the Memorandum of Association (“MoA”) and the Articles of Association (“AoA”) for it to be legal and binding on the shareholders.
Conclusion:
The Cofounders’ Agreement aims to settle the contribution of each founder towards the achievement of the end goal and therefore sets out their rights with respect to the monetary investment, experience, network, and intellectual property rights made by a founder.
However, in case of the Shareholders’ Agreement as the organization is already in place it focuses more on how the shares will be bought, sold, or transferred and what happens in the event of the death of a shareholder. It also sets out how the company will run and therefore clearly states the information on appointment and removal directors, details regarding the board meetings, the management information, associated banking arrangements and other financial details of the organization.
The content of this article is intended to provide general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
