Unanimous Shareholder Agreements: Considerations for Venture Start-Ups

A common discussion that takes place among founders of a venture start-up is the question of whether a unanimous shareholders agreement (USA) should be established. Generally speaking, a USA is an effective means of controlling the terms on which shareholders may sell their shares in the start-up entity. Most USAs will provide certain pre-emptive rights to purchase shares sold by other shareholders and may also include rights of first refusal, shot-gun provisions and other useful contractual rights. However, for growth companies, that is, companies whose products or services are likely to take off quickly and therefore the need to raise capital at various stages will become increasingly relevant, a USA has it downfalls.

Under many jurisdications, a USA removes power over the company from the directors and confers it on the shareholders. The number of shareholders in a growth company could quickly increase. Under its terms, subsequent shareholders become party to the USA and therefore incur, as shareholders, power over decision making functions for the company. In most cases, a growth company will include a number of passive investors who generally don't wish to be included in the day to day operations. A multiplicity of parties to a USA can lead to a cumbersome decision making process which in turn could be a competitive disadvantage to the growth company.

The automatic inclusion of new shareholders as parties to the agreement can lead to other problems (sometimes significant) when considering the share transfer rights contained in the USA as they apply to a company that is growing quickly. New shareholders may include venture capital investors or other institutional investors with signficant financial resources. Shareholders without financial means run the risk of being bought out by these wealthier shareholders right as the business is on the cusp of really taking off.  Also, an offer to purchase shares, exercised under a traditional shot-gun clause, could lead to unexpected share shuffling.  For example, if one shareholder makes an offer to the other shareholders, some of the shareholders may agree to sell their shares to that shareholder, while concurrently, the other shareholders would opt to buy the offering shareholders shares.

All in all, each situation is different, and before entering into a USA you should take a look at your business and its prospects for growth, and with the help of your professional adviser set up an arrangement that is in the best interests of your business.