Shareholders Agreement: Key Provisions Checklist

What this covers: Checklist of the 20 key provisions to review in a Shareholders Agreement (SHA) before signing. Designed for founders, early investors, and management shareholders. Each item includes what to look for and the key negotiating points.

Section A: Governance

1. Reserved Matters (Matters Requiring Investor Consent)

• What it is: A list of actions the company cannot take without the consent of the investor or a specified percentage of shareholders (e.g., 75% or investor consent)
• What to check: Scope of the list, is it proportionate? An overly long reserved matters list effectively gives the investor a veto over day-to-day business
• Standard items in a reserved matters list: Amendments to MoA/AoA, issue of new shares, incurring debt above a threshold, change of business, related party transactions, key management appointments, acquisition/disposal of assets above a threshold, winding up

2. Board Composition and Nomination Rights

• What to check: How many board seats does each investor have the right to nominate? Is there an independent director requirement? What is the quorum for valid board meetings? Can a board seat be held by an alternative director?
• Red flag: Investor board nominee has both affirmative and negative blocking rights

3. Voting and Decision-Making

• What to check: Shareholder voting thresholds for different categories of decisions; are there any matters requiring consent by a specific class of shareholder (e.g., preference shareholders voting as a class)?

Section B: Economic Rights

4. Liquidation Preference

• What it is: The right of preferred shareholders (investors) to receive their investment back (plus a multiple) before common shareholders (founders) receive anything in a liquidation or sale
• Types:
• Non-participating: investor gets their preference or their pro-rata share of proceeds, whichever is higher
• Participating: investor gets their preference PLUS their pro-rata share of the remaining proceeds (more dilutive to founders)
• Capped participating: participating up to a cap (e.g., 3x), then converts
• Red flag: Participating liquidation preference with a high multiple (e.g., 2x or 3x), founders may receive nothing in a moderate exit

5. Anti-Dilution Mechanism

• What it is: Protects investors from dilution if new shares are issued at a lower valuation than the investor’s entry price (a “down round”)
• Types:
• Full ratchet: most investor-friendly; adjusts conversion price to the new lower price regardless of how many shares are issued
• Broad-based weighted average: most commonly used; adjusts conversion price based on a weighted average of old and new issuance prices, taking into account number of shares
• Narrow-based weighted average: similar but uses a narrower share count in the formula
• Practical impact: In a down round, broad-based anti-dilution gives founders less dilution than full ratchet

6. Dividend Rights

• What to check: Are there cumulative preferred dividends? What rate? If undeclared, do they accrue and compound? Cumulative dividends in a pre-profit startup have limited real impact but can create large preference amounts on exit

Section C: Transfer Restrictions

7. Right of First Refusal (ROFR)

• What it is: Before a shareholder can sell their shares to a third party, they must first offer the shares to existing shareholders (or the company) at the same price and on the same terms
• What to check: Does ROFR apply to founder shares? To investor shares? Time period for exercise (typically 15-30 days); can ROFR rights be waived by a percentage of holders?

8. Right of First Offer (ROFO)

• What it is: Before selling shares, the selling shareholder must first offer them to existing shareholders and receive a bid; if the ROFO holder does not match a third-party offer, the selling shareholder can complete the sale
• Distinction from ROFR: ROFO imposes a negotiating obligation; ROFR imposes a matching obligation

9. Tag-Along Rights (Co-Sale)

• What it is: If a founder sells their shares, investors have the right to sell their shares alongside the founder at the same price and on the same terms (proportionally)
• Purpose: Prevents founders from selling to a buyer who only wants some shareholders to exit
• What to check: Threshold trigger (applies if founder sells more than X% of shares); is it a full pro-rata tag or limited?

10. Drag-Along Rights

• What it is: If a specified majority of shareholders (by value) agree to sell the company, they can require all other shareholders to sell their shares on the same terms
• Purpose: Ensures that a minority cannot block an acquisition
• What to check: The threshold (typically 75%); whether the drag also requires founder consent; protections for minority, they must receive the same price and terms as the majority sellers

11. Lock-In Period

• What to check: Are founders’ shares subject to a lock-in (cannot be sold for a defined period)? Investors typically require founder lock-in for 1-3 years post-investment

Section D: Founder-Specific Provisions

12. Founder Vesting / Reverse Vesting

• What to check: 4-year vesting schedule with 1-year cliff is standard; acceleration on double trigger (change of control + termination without cause); what is the buy-back price for unvested shares (face value or fair market value)?

13. Founder Non-Compete and Non-Solicitation

• What to check: Are non-compete restrictions during the term only? Post-exit non-competes are generally unenforceable under Section 27 of the Indian Contract Act; non-solicitation of clients and employees is more likely to be enforceable if narrowly drawn

Section E: Information and Compliance Rights

14. Information Rights

• What to check: What financial information does the investor receive and how frequently (monthly management accounts, quarterly financial statements, annual audited accounts)? Right to inspect records and visit premises?

15. Pre-Emptive Rights (Right to Participate in Future Rounds)

• What it is: The right to participate in future equity issuances to maintain the investor’s percentage ownership
• What to check: Is it a full pro-rata right? Any exclusions (e.g., ESOP grants, small issuances below a threshold)?

Section F: Exit and Liquidity

16. IPO Provisions

• What to check: Any obligations on the company to pursue an IPO within a specified time (typically 5-7 years from investment); drag-along in connection with IPO

17. Drag-Along in an Acquisition

• Already addressed in item 10 above; confirm that sale process and price determination are governed by robust provisions and that founders have a say in approving the terms

Section G: Administrative

18. Dispute Resolution

• What to check: Arbitration (recommended) with specified seat, institution, and number of arbitrators; mediation as a pre-condition to arbitration; specific jurisdiction clause for urgent interim relief

19. Amendment Procedure

• What to check: What shareholder percentage is required to amend the SHA? Is investor consent required for any amendment? Overly easy amendment creates risk; overly difficult creates inflexibility

20. Governing Law and Jurisdiction

• What to check: Indian law for domestic investments; choice of seat for arbitration; whether foreign law governs (common for SBIs or US-domiciled investment funds)

This resource is for general information purposes only and does not constitute legal advice. For advice on your specific situation, seek appropriate professional counsel.