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What to do with shares and shareholder agreements?

Establish agreements: it seems clear, but if you have to work with it, your e-mailbox quickly fills up with a ton of documents. What should you do with all those papers? The only thing you want is to sign and get on with things. But you must remember: about tag and drag, good leaver, caps, governance, shareholders’ meetings and God knows what else.

What should you do with all this? Everything: you have to know what you are doing. Know what’s in that pile of papers. It’s about your business. And as you work up a sweat to be sure that fulfilment and marketing are done just right, you must also see to it that your authorisation and ownership is organized properly. That everything is pointed in the right direction there, as well.

The most important premise is that if those men in suits (a.k.a. lawyers and accountants) cannot state clearly what is in the documents, that is their problem. Not yours. If what is written in the documents is unclear. Or even incomprehensible. That has to do with the documents. Not you. After all, all those documents contain agreements. Agreements to which you must adhere. So you need to understand them. Everything else is nonsense.

Here you already have the manual for dealing with paperwork. I will name four things you have to watch out for. For each one I will put the elements/provisions from the documents so that you know where to look first. The choice is based on more than 15 years of practical experience. A small disclaimer: this does not mean you won’t have any fuss and bother with the points not discussed here. But the chance is a lot smaller (in my experience, in any case).

I will stick to the essentials. As an entrepreneur, there are many things you do not have to worry about (that is to say: if you get legal help for the details). You should not spend your time on issues that are not important. Your lawyer can handle those themselves.

But beware: there are four points that really always affect you. That determine how you will do business. If you check these four points, you will guide yourself through the paperwork.

The four points

1. Arrangement on ownership. Who gets how much of the company and at what price?

2. Distribution of co-decision rights. Who has what authority when it comes to decision-making?

3. Commitment. Who may do what on the side?

4. Departure. What happens at departure or takeover?

As standard procedure a number of documents belong with the agreements: a shareholders’ agreement, an investment agreement and the articles of association on your startup. Those three documents contain the most important agreements. The investment agreement is often combined with the shareholders’ agreement.

There are usually more documents. For example, there will often be a management agreement and an issue/sale deed. And sometimes there are share certificates and a STAK. If everything is in order, you will already find the principles of the other documents in the shareholders’/ investment agreement and articles of association. So simply limit yourself to those three docs and read the rest only if your lawyer feels that you must.

Who gets how much of the company and at what price?


If you’re talking about owning the company, you are talking about shares. So the issue here is how many shares each will receive and what they will pay for them. The last purchase price is also known as the rate. So: who gets what shares at what rate? If the company is later sold, that means the sale of those same shares.

Holding shares, owning part of the company, means having profit rights and controlling rights. Those controlling rights will be addressed below. Having profit rights means having a right to the profit of the company that the company pays out to you. It also gives you a right to the profit you realise if you sell your shares for more money than you bought them for. So how much profit you get depends on how many shares you have. If you have 10% of the shares, you have a right to 10% of the profits the company makes and 10% of the sale price at sale.

Preference shares

There are shares that do not receive part of the profits, but rather a fixed amount (if there is profit). These are preference shares. In a year when there is profit, for example, such a share gives you a right to € 1,000 in profit. If there is no profit, you get € 0. If the profit rights are, as it were, saved up until a year when there is indeed profit, this is called cumulative preference shares. If such a share gives you a right to € 1,000, for example, and there is no profit for two years but there is profit in year three, you get € 3,000 in the fourth year.

The price is the price per share. The price determines the value of the company. Or, conversely, the value of the company determines the price. If you pay € 10,000 for 10%, therefore, your company is worth € 100,000.-. And if the company is worth € 100,000.-, you pay € 10,000. – for 10%. When determining the value, every company is worth today what it has today plus what it will earn tomorrow.

Future profit is called goodwill. Startups have almost nothing today. No buildings and no machinery (except for some laptops). Often just a bit of intellectual property (inventions and copyright on computer code). So startups are almost always worth their future profit. The startup business model always shows an exploding profit in years three to five. The hockey stick. But whether that will come or not is still up in the air. Nobody knows for sure. Whether a startup is allocated any value (by people that want to invest in it) is therefore mainly determined by the estimate of the chance that the hockey stick will come. The greater the chance that is estimated, the higher the value. That chance is determined by the technique (how unique is it and how difficult is it for competitors to jump in?), is the business model scalable (will that hockey stick come without 1,000 people having to work on it?), and is there a market for it and is that market large? Has the product already proven itself to customers? It is also often said that investors look not so much at the product but the management: do they have confidence in the people that are doing it?

Determining the value of a startup is hardly different than playing in a casino, but if an outsider (investor) values the startup at a tidy sum, that value is unbelievably important. Then there is in any case a person that will put hard cash in on the basis of that value. How the value is determined is rarely important in a legal sense.


Sometimes investors agree that they will not receive shares right away, but they will borrow money and that loan can later be used to pay for the shares. This might be two or five years later. It’s whatever you agree on. Such a loan is called a convertible loan. But converting is actually not the right word. It seems as if the loan is converted into shares, but that is not true. The loan is used to pay for the shares. Instead of the loan being repaid, the loan is adjusted against (offset by) the payment for the shares and the investor receives shares.

How many shares the investor receives upon conversion depends on the rate. Sometimes a rate is already determined when the convertible loan is concluded. Sometimes the rate is set when the next big investor arrives. Often the rate is maximized. Then the investor never pays more than a certain amount (a cap) for the shares. Everything additional that the shares are worth at the conversion is immediately profit for the investor.


The agreements on the value of shares are in the investment agreement. And if this is part of a shareholders’/ investment agreement, they are in that as well. The eventual share distribution is almost always stated at the beginning of the shareholders’ agreement. A convertible is also in the shareholders’/investment agreement. Or sometimes in a separate document, but if everything is as it should be it is indeed defined in the shareholders’/investment agreement.

It is stated in the articles of association what type of preference shares there are. If there are no preference shares, you do not have to read the articles of association on this topic.

You can have your lawyer check whether all the documents are properly aligned.

Who decides what?


The management makes all the legal stipulations. At a startup as well. What products will be developed and at what prices, with whom will there be collaboration, who will be recruited, where will the startup have its office, what kind of pension plan will there be, etc., etc. The management (also called ‘Board’) is appointed (and terminated!) by the shareholders. So the shareholders are ultimately the most important in the startup. They can also tell the management what they should do in general terms. And if one director goes in a direction that the shareholders don’t like, he can leave. There can also be directors who are not appointed by the shareholders. These are ex officio directors. They may only do what the appointed directors authorise them to do.

The management may consist of one or more persons. In the latter case, they must work together. Each member of the management is in principle responsible for the functioning of the entire Board. The management can also be a B.V. (private limited company). Then the management of the B.V. takes the resolutions.

The shareholders are the most important not individually but together. This involves the shareholders that jointly take resolutions in a meeting. This meeting is called the ‘general meeting of shareholders’. Often abbreviated as GMS. If all shareholders agree, incidentally, they can also take resolutions outside a meeting. But then, again, it comes down to all shareholders and not the individual shareholders. How many votes each shareholder may cast depends on the number of shares they have.

If nothing is agreed otherwise, after being appointed the management can do virtually everything. Only for resolutions that directly affect the raison d’être of the startup must the management first request approval from the shareholders. An example of this is the sale of all the activities of the startup.

Agreements are nearly always made about what the management can and cannot do without the approval of the shareholders. Then a list of major resolutions is prepared, and the shareholders and the startup agree that the important resolutions can only be taken after the approval of the GMS. There are many lists of such resolutions in circulation. In general, there is little relevant difference between them. Often they are such resolutions as the conclusion of contract with a monetary value of more than amount X, buying or selling property, guaranteeing the debts of another, concluding contracts with the Board (or their wives), entering into financing, selling business units or buying other companies. And so the management is controlled by the shareholders in this way.

But we are not there yet. Some resolutions of the shareholders (or the management) can turn out negatively for shareholders that hold few shares. Suppose: two shareholders together own 60% of the shares and are also both directors. They can grant themselves a handsome salary. Their management resolution to do this must be approved by the GMS (general meeting of shareholders). That is not a problem, either: both directors, after all, have a nice majority at the GMS. In order to prevent this, some of them must have the agreement of more than one-half the shareholders. For example, 80% or even the agreement of all the shareholders. Be alert to this. You do not want a minority shareholder to get too much control over the startup. Sometimes it is stipulated that a certain minority shareholder must agree. Look closely if you feel this is acceptable for resolutions involving that amount: for some resolutions this is less bad than for others. But you don’t, for example, want it to be possible for the adoption of the budget to be thwarted.

Then there is the distribution of influence within the GMS itself: the highest body. There, too, there are ordinary and important resolutions. For certain resolutions that are very important for the shareholder, for example diluting (issuing shares), a larger majority is then agreed upon. For example 80% of the votes. Conversely, influence is also taken away from some shareholders: for example by giving them not ordinary shares but shares without voting rights or share certificates.

Also be aware that a blocking vote can lead to stagnation. In such a case, after all, the shareholders have to agree. This can happen with a 50-50 split of the votes, with an 80-20 split, for example, or with a blocking vote. It can then be useful to agree in advance that if this happens you will appoint someone to take a resolution in the matter.

Supervision other than by the shareholders

There are other ways to regulate supervision of the management as well. It can be done by appointing non-executive directors. Or by a supervisory board. And recently I saw a situation in which a shareholder may have an ‘observer’ within the management. They are not allowed to vote, and only have the right to be present and hold the floor.

At startups these types of structures serve above all to gather knowledge and the network of people that have already earned their stripes closer to the management. This is a very good reason. Conversely, however, management is becoming more and more complicated and formal. More hassle. So I prefer a loosely regulated network (of mentors, friends and advisors) around the management than this type of formalized advice and supervision.


The handling of resolutions that must be submitted to the GMS is explained in the shareholders’ agreement (at management) and in the articles of association. Sometimes these are the same lists and sometimes they are different. I would read them both carefully. The handling of the voting rights of shareholders is explained in the articles of association (and in the case of certificates also in the certification conditions). The other rules are also in the articles of association and/or in the shareholders’/investors’ agreement.

So you must check two things: whether it is feasible and whether you do not wish to or cannot dispute resolutions. This concerns resolutions that directly affect your interests. Deals with shareholders/directors, for instance, and issuing additional shares at an attractive rate without your being able to participate in the issue.

Keep in mind that shares may be issued later. Which may result in a situation where today, with 20%, you can block a resolution but that tomorrow, with 15% you may just be unable to do this.

Who may do what (on the side)?

You want everyone to be entirely dedicated to your startup. And, preferably, that they do nothing else. And certainly not that they walk away after a few years to set up their own competing company, strolling off with all your human capital. You yourself, after all, are entirely dedicated to your startup. This means that you are forbidden to work somewhere else, or after your contract you are prohibited from working for a competitor. Or that you cannot leave before a certain date.

This commitment is established by the shareholders and the investor. You can find this involvement in two types of articles. The non-competition clauses and the leaver provisions.

Non-competition clauses mean that as long as you work at the startup you may not work for a competitor, and are also forbidden to do this for a period thereafter (one to two years). That makes sense. But please note: this type of provision can really put you in a bind if you want to leave anyway. And many people want to leave. It’s all in the game. The trick is to find a balance between the interests of your company and your own interests. So that you won’t compete with the company but can still earn a living for yourself. This calls for realism on both sides.

So make sure that you are not too quick to accept non-competition clauses. These are the most annoying conditions when it comes to leaving. And certainly if those staying behind have no reason to be on your side, they can really be a problem. You are also not an employee (protected by law) but in this case a shareholder. This means that, except in extreme circumstances, even quite one-sided (read: disadvantageous) provisions can simply be upheld.

Leaver provisions govern what happens when you leave. If a director/shareholder leaves, it is normal that they surrender their shares. If this does not take place, after all, those staying behind are also working for the director that left. This is psychologically negative.

If you leave earlier than agreed, you accept a penalty discount on the sales price (of your shares). Thus it is ensured that you stay longer. If you leave earlier nonetheless, you are a so-called bad leaver. Then you must sell your shares at a lower rate than the rate paid if you properly stay and finish your specified time (and are thus a ‘good leaver’). You are also a good leaver, for what it’s worth, if you die, retire or become ill. You are also a bad leaver if you mess things up, toss your CTO out the window or compete after all.

Intellectual property

What you and your colleagues may do on the side is also determined by what you can do on the side. This is why agreements concerning intellectual property rights are dealt with here. Normally, everything that is made with regard to software/content/ belongs to the startup. Otherwise you or one of the others may wish to use those intellectual property rights to compete with the startup.

Experience shows that this is often poorly regulated. And that, at the moment when your software/content/invention is booming, can be quite problematic.

Concluding a shareholders/investment agreement is a good time to ensure that all rights of intellectual property required by the startup indeed end up there. Tip: also note who owns the domain names.

In this regard: a great deal of technology is not a patent, but knowhow. Knowhow can often not be protected. So it is often a good idea to agree that that knowhow will be kept confidential as far as possible. To not make it all too easy for the competition.


The non-competition and leaver provisions are contained in the shareholders’/investment agreement. Sometimes, there are also non-competition clauses in the management agreement. It may happen that these are more stringent than those in the shareholders’ agreement, so I would definitely have someone check if these agreements are consistent.

The rules concerning intellectual property and confidentiality are part of the shareholders’/investment agreement. Pay attention here that not only your holdings are considered on this point but also the owners of your holdings (that is to say, privately). The owners (meaning yourselves) often have the rights and not your holdings.

What happens on departure or takeover?

If a manager/shareholder leaves there are good leaver/bad leaver (or good leaver/early leaver/bad leaver provisions. I already discussed these above, because they also play a role in keeping the managers involved in the startup.

And then there are the drag along and tag along provisions. Also called ‘drag and tag’. A drag means that if a majority of the shareholders want to sell the shares, the minority have to go along with this. They are pulled along (hence the word ‘drag’). Without such a provision, after all, a minority shareholder could in fact block an acquisition or participation by not selling. Without such a drag, they simply do not need to sell. The provisions are often formulated in a complicated way. Important for you to check that they are in there at all. Your lawyer can check them. In addition, you must determine what majority of the shareholders have to be willing to sell in order to set the drag in motion. If you are a majority shareholder, you want to be able to sell easily, and if you are (one of the) minority shareholders, you want to avoid it happening that you can be all too easily forced to sell against your will.

A tag is a mirror image of the drag. A tag means that if the other shareholders want to sell their shares, you can sell yours along with them. So that you do not remain behind like a lonely fool with a small interest in your hostile company while your former friends drive around in big cars.

Selling shares outside the situations described here is often difficult. In the articles of association a so-called blocking arrangement is always included (the name speaks for itself). In this context, in practice another party can only buy their way in without these obstacles if at least the majority of the other shareholders agree with this; it is no fun being a shareholder if the rest of them don’t want you.

At an IPO (initial public offering), finally, shares are issued. So they are not sold. The issued shares are offered to the public and then traded on the exchange. A resolution to issue is a shareholders’ resolution. Usually it is possible to get a majority for this. Sometimes you see provisions that take into account an IPO. For example with a convertible.  Your lawyer can determine whether these are relevant or not.

Investors’ exit

An investor often wants to see efforts made to effect an exit. But there is usually not more than a non-binding intent. If something different and more imperative is written there, you will have to get your lawyer to try to soften this. An imperative agreement with a horizon of a few years or longer is not justified.

It is possible that an investor demands that if they want to sell, everyone has to go along with them. That they, as it were, set a drag in motion on their own. Try not to sign this. If it is unavoidable: too bad. In practice, things often still go okay because a buyer wants the other shareholders (often also managers) to be enthusiastic about the deal.

Where The relevant exit provisions are contained in the shareholders’/ investment agreement.

Jetse Sprey


About Jetse Sprey

Jetse is associated with our office as legal counsel. Jetse finds solutions instead of problems and is able to break stalemates again and again. He speaks his mind and is not guided by what he thinks his clients want to hear.

He writes sharp, readable contracts. He has extensive experience with Blockchain and is an entrepreneur in this field himself. He writes convincing procedural documents and advice. He is knowledgeable in intellectual property, privacy and corporate law.

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