Shareholder Agreements & Disputes: What Every Founder Should Know

The Shareholders Agreement is the bedrock of any successful business. A poorly crafted or inadequate agreement can lead to significant issues, including shareholder disputes over misaligned exit strategies, equity dilution, or unclear roles and responsibilities. Lawyer Izwan Zakaria, Principal of Izwan & Partners, explains how founders can mitigate these risks by creating robust shareholder agreements and fostering transparent communication with investors.

In this episode of P&L, we explore the critical clauses every startup needs—such as deadlock mechanisms, vesting provisions, and minority rights—and discuss legal options for resolving disputes. Izwan also shares a bit of history with us, on the origins of companies, as well as practical advice on aligning expectations, preventing conflicts, and selecting investors who bring more than just funding to the table.

Here are some key highlights from the conversation:

- The Origins of Companies: The 16th-century creation of the East India Company revolutionised commerce by enabling individuals to pool resources, mitigate risks, and drive collective economic growth—laying the foundation for modern companies as key tools for entrepreneurship and wealth creation.

- The Importance of Shareholder Agreements: A well-drafted shareholder agreement is essential for defining roles, managing conflicts, and ensuring business continuity. Key clauses include deadlock mechanisms, vesting provisions, tag-along and drag-along rights, and pre-emptive rights to prevent future disputes.

- Causes of Shareholder Disputes: Disputes often arise from misaligned expectations, unequal contributions, or unclear roles among founders. Equity dilution, decision-making deadlocks, and exit strategy conflicts are common flashpoints.

- Preventing Disputes Early: Open conversations among founders about long-term goals, roles, and equity splits are crucial. Vesting provisions and regular performance reviews can help ensure fairness and accountability.

- Investor Dynamics: Founders should carefully vet investors beyond financial contributions. Ideal investors bring mentorship, networks, and industry expertise. Red flags include excessive control demands, unrealistic expectations, and misaligned visions.

- Key Clauses for Investors: Investors often seek clauses like information rights for financial transparency, pre-emptive rights to maintain shareholding during new funding rounds, and anti-dilution protections for downside scenarios.

- Legal Avenues for Dispute Resolution: Options include mediation, arbitration, or litigation. Deadlock mechanisms in agreements can prevent prolonged disputes, while robust clauses ensure fair exits even for minority shareholders.

- Lessons for Founders: Founders should assess the compatibility of investors and focus on setting up industry-standard terms in agreements to attract future investors and avoid a “broken cap table.”