# The shareholders' agreement settles your fights and your exit in advance Know how before you sign - Author: Petri Lehmuskoski - Published: 2026-10-06 - Group: Governance - Canonical: https://morescarsthantrophies.com/writing/shareholders-agreement-settles-your-fights-and-your-exit Taking in external capital means that you need to respect the plan and the idea you sold to the investors. It is not your money, and you are not anymore the company. The shareholders' agreement (SHA) is where that is written down. Every startup needs one from the start, and after 280+ investment rounds I can say that most first-time founders sign it without understanding what its clauses will do later. The agreement is rarely used. It sits in a folder for years, and then it comes out on two kinds of days: in times of trouble, when shareholders fight, and in times of happiness, when the company is sold. On both days the outcome is already decided, because the shareholders agreed the answer when they signed. I write this as an investor, for founders about to sign their first one. The conflicts below are predictable. A good agreement settles each of them in a way all sides can live with. A bad one settles them too, and the founder learns how on the day it matters. ## You sign it once and use it twice: in a fight and in an exit Founders use one phrase for two different documents. The first half is control: board seats, the decisions that need investor majority acceptance, and the ones that need a qualified majority. Founders learn that half within a year, because it shows up in every board meeting. The second half is the economics of the ending: liquidation preferences, vesting, leaver terms, drag-along. Founders do not meet that half until a co-founder leaves or a buyer signs, and it surprises them. ## Who gets paid first when the company is sold Typically it is the SHA that dictates how the proceeds from an exit are divided, not the ownership share. In my experience this shows in almost every small and mid-sized exit, and how much it shows depends on how much capital the company has raised. The arithmetic is worth doing once, slowly, with an invented example. A company is sold for €30 million. It has raised €20 million. The founders hold 40%, the late-stage investors 30%, and the early investors the rest. Assume the latest round carries a 1x liquidation preference that does not participate: the late investors take either their money back or their ownership share of the price, whichever is higher. Their 30% would return €9 million, so they take the €20 million. The remaining €10 million is divided among the others by ownership, and the founders receive €5.7 million. A 40% holding has collected 19% of the price. Now change one number. At a 2x preference the same €20 million is a €40 million claim against a €30 million sale. The late investors take everything, and the founders and early investors receive nothing. Nobody has broken the agreement. The founders now need a €40 million sale to receive their first euro. A 1x preference that does not participate is fair. The investors are investing money and the founder is investing time, and the upside is much higher for the founder than for the investors. A founder should ask two things about any preference: the multiple, and whether the investor also shares in what is left after taking it. ## How each new round changes the order of payment Preferences are rarely a single layer. Each round adds its own, and the founders' break-even rises with every round. The agreement also sets who is paid first among the investors. In a stacked structure the latest round is paid before the earlier ones. In a pari passu structure the rounds share the claim. At the same sale price, those two structures leave different people with nothing. Pari passu is typical in the rounds I see, although seniority sometimes follows from how the earlier rounds were built. Founders and angels sit at the bottom together. I have watched this from the bottom of the stack. I was the first angel in a company that later raised more capital than its own evidence required. The money went largely into offices in several countries and into adjacent products, and most of it did not work. The company then needed a series of bridge rounds on hard terms, each taking a larger share of the founders' ownership than the one before. The exit was real, and for me it was a strong one. For the founders it was not. At a later presentation one of them said they could have had a better outcome without the VCs at all. Public cases show the same pattern at larger scale. One company was sold in 2015 for less than half of its last private valuation, and the capital it had raised came to about 70% of the sale price. The employees' common shares were valued at about a tenth of the year before, and the investors' preferred shares at roughly seven times as much per share. Run your own waterfall after every round. It takes an evening. ## What happens to the shares when a co-founder leaves Founders fall out, and one of them leaves. It is a really common conflict, and the vesting and leaver clauses exist for it. Where nothing is written down, the fight is expensive. One company paid a very large settlement to an early collaborator who had been pushed out, and the payment became public in its listing documents. Where the terms are written, courts enforce them. In 2018 a court held a dismissed director to a clause that made him hand over his shares at nominal value, far below what they were worth. In 2024 an appeal court upheld a clause under which a founder who left in the first year of a three-year vesting lost all his shares. So read three things: how many years the vesting runs and whether it has a cliff, what makes a founder a good or a bad leaver, and what price each is paid, including how fair value is set. On the leaver question, practice differs. Some agreements have a middle category for a founder who resigns: that founder can be made to sell all shares, but is paid fair value for the vested ones. I am stricter. A founder leaving the company damages the company and the investors, and should not be rewarded. My own line is eight years from the founding of the company: a founder who has stayed that long has earned the shares, whatever the reason for leaving. Whichever line your agreement draws, know it before the argument with your co-founder starts. ## Who can decide to sell the company A buyer wants all the shares. The drag-along clause says which majority can accept an offer and force everyone else to sell on the same terms. Thresholds vary. One version requires two-thirds of all shares, including a majority of the investors' shares. Read your own threshold and count who can reach it without you. Some agreements go further and give investors an exit clause: a right to start a sale, or to have their shares bought back, once a set number of years has passed. I believe that clause is unfair toward the founders and the angel investors. In the cases I've seen, investors are often the ones who start the selling process. With an exit clause, the company might be sold on terms that are good for the late-stage investor and bad for the angels, because the preference wipes out their earnings. One public case reached that outcome through a drag-along. When a company was sold in 2018, the preference on the investors' shares was larger than the entire sale price, and the offer document stated that nothing was payable on the ordinary shares. The investors who had led its largest rounds exercised the drag-along. The founders, with early investors and employees, have sued the board members who approved the sale. That case is not decided. ## Who decides when a shareholder sits on both sides of the table Control is settled in three places: who appoints the board, which decisions need a qualified majority, and what happens when a shareholder has a personal interest in a decision. Certain decisions need the acceptance of an investor majority. Read the list of those decisions before you sign. Check also which decisions need the founders' acceptance, and whether that still holds after the next round dilutes you. Then find the conflict-of-interest rule. A sale where the preference takes most of the price is itself a conflict, because the investors are paid and the ordinary shareholders are not. In one case a company was sold in 2005. Management received 13% of the price through an incentive plan the board had adopted, the investors received 87%, and the ordinary shareholders received nothing. The court found in 2013 that six of the seven directors were conflicted, and still held the deal fair, because the ordinary shares had no economic value before the sale. The court did not rescue the ordinary shareholders. The protection has to be in the agreement, so check whether a shareholder may vote on a deal between the company and itself. ## Four smaller questions the agreement also answers - **How is fair value set?** A leaver's price depends on it. Look for a method, such as the last round's price or an independent expert. - **What do the founders guarantee?** Founders give warranties about the company at the investment. Check whether liability falls first on the company or on the founders personally, and where it is capped. - **Who must accept the next round's agreement?** Some agreements commit every shareholder to support a new round once a set majority backs it. - **What counts as the company's work?** The agreement assigns the founders' intellectual property to the company and limits side activities. List anything you intend to keep before you sign. ## A bad agreement settles every conflict against you, so walk away from it Bad agreements are often used because of the costs involved, and a founder with one term sheet wants the round closed. A first-time founder should still never accept a bad SHA. It will kill them in the end. It is better to walk away and keep bootstrapping. A founder does not really give up anything by walking away from a bad deal. It is FOMO that keeps them there. After a bad agreement everything gets worse, because later investors build on the structure the first one left. More scars than trophies. Note on the examples: the €30 million sale is an invented illustration. The company cases are public, drawn from court decisions, company filings and press reporting, and are left unnamed. The angel investment is my own, with identifying details removed.