The Founders' Shareholders' Agreement: protecting the team before growth
Planning to set up your startup with other entrepreneurs? The founders' shareholders' agreement is the confidential contract that governs relations between co-founders: governance, key decisions, intellectual property, entry and exit from the share capital, founder departure, non-competition, and preparation for fundraising.
What is a founders' shareholders' agreement?
The founders' shareholders' agreement is a confidential contract signed between the founding shareholders or partners of a company. A founding partner is a member of the company who participated in its creation.
This document governs relations between founders beyond what the articles of association cover. It organises governance, the rights and obligations of each party, the conditions for entering and exiting the share capital, conflict management, intellectual property, and the founders' operational commitments.
For a startup, this agreement acts as a legal internal rulebook between entrepreneurs. It clarifies what founders owe each other, what happens if one of them leaves, who holds the rights to creations, how decisions are made, and how the company can prepare to welcome investors.
Key takeaway: the founders' shareholders' agreement does not serve solely to manage conflicts. Its primary purpose is to prevent a founder dispute from blocking the company at the very moment it begins to grow, sign important contracts, file a trademark, or prepare a fundraising round.
The agreement defines how decisions are made between founders.
It governs transfers, entries, exits, exclusions, and departures.
It gives a clear, structured picture of the team before a fundraising round.
The shareholders' agreement must be considered alongside the other legal documents of the startup: the articles of association, service agreements, employment contracts, non-disclosure agreements, intellectual property assignment agreements, the term sheet, and, when the time comes, the shareholders' agreement signed with investors.
What are the objectives of the founders' shareholders' agreement?
Defining the management and governance arrangements for your startup
Your founders' shareholders' agreement has several objectives. One of them is to define the management and governance arrangements for your startup between co-founders.
In concrete terms, it must answer very operational questions:
- how are decisions made within the company?
- who is the company's legal representative vis-à-vis third parties?
- which decisions require the agreement of all founders?
- can founders work for organisations other than the startup?
- how should roles be allocated between CEO, CTO, COO, CFO, and other key functions?
- how should strategic disagreements be managed?
This clarity is essential to avoid deadlock when signing an important contract, hiring, raising funds, filing a trademark, opening a subsidiary, or pivoting the business model.
Determining the conditions for entry and exit from the share capital
The shareholders' agreement also aims to determine the conditions for entering and exiting the share capital of the startup.
It must in particular answer the following questions:
- to whom may shareholders sell their shares?
- from what point in time may they transfer their shares?
- do the other founders have priority in the event of a transfer?
- under what circumstances can a founder be required to sell their shares?
- how should a departing founder's shares be valued?
- what happens in the event of voluntary departure, dismissal, misconduct, illness, death, or abandonment of the project?
Business point: founder disputes are extremely costly. They slow down sales, fundraising, the signing of strategic contracts, and the company's ability to hire or reassure investors.
What is the difference between a shareholders' agreement and the articles of association?
The articles of association primarily organise the legal life of your company: legal form, registered office, corporate purpose, share capital, powers of the director, general meeting rules, duration of the company, and legal operating procedures.
The founders' shareholders' agreement, on the other hand, governs in writing the relationships and dealings between the founders. In principle, it is a confidential document, whereas the articles of association are public, as they must be filed with the registry or relevant register.
Third parties therefore do not necessarily have knowledge of the agreement, which is established alongside the company's articles of association.
| Document | Function | Public or confidential? |
|---|---|---|
| Articles of association | Organise the company vis-à-vis third parties and public authorities. | Public or accessible via official registers. |
| Founders' shareholders' agreement | Governs confidential relations between co-founders. | Confidential between signatories. |
| Investor shareholders' agreement | Governs relations between founders, investors, and shareholders after a fundraising round. | Confidential between signatories. |
Shareholders' agreement or partnership agreement — are they the same thing? In practice, these terms coexist. But in this article, we refer more specifically to the agreement concluded between the startup's founders at the time of creation. It must therefore be distinguished from the shareholders' agreement signed with investors in the context of a fundraising round.
Why does the agreement give investors a clear picture of the team?
The shareholders' agreement gives investors a view of how the startup's team operates before a fundraising round. This agreement acts as a kind of internal rulebook for the entrepreneurs who have built the company together.
A clear and balanced agreement demonstrates:
- that the founders have anticipated conflicts;
- that intellectual property rights belong to the company;
- that operational roles are defined;
- that exit clauses are in place;
- that strategic decisions are organised;
- that the company can welcome future investors without an unresolved founder dispute.
This balance fosters a sense of cohesion within the team. It also reassures investors during legal due diligence, alongside trademark protection at OAPI, the quality of commercial contracts, and the preparation of structured fundraising documentation.
Need a shareholders' agreement or founder contract reviewed?
ALF reviews your agreements, commercial contracts, tech contracts, intellectual property clauses, non-disclosure agreements, and fundraising documents to secure your growth.
Have your contract reviewed →What are the key clauses of a shareholders' agreement?
The pre-emption clause
The pre-emption clause governs the situation where a shareholder wishes to transfer all or part of their shares to a third party. It requires them to first offer those shares to the existing shareholders of the startup on a priority basis.
Example: Hamid decides to sell his shares to Moussa, who is not a shareholder of the startup. The remaining shareholders have the right to purchase Hamid's shares at the same price offered to Moussa, as they have priority.
The approval clause
The approval clause (clause d'agrément) makes any transfer of shares to a third party subject to prior approval by the other shareholders or a corporate body.
Back to the example of Hamid, who wishes to sell his shares to Moussa, a non-shareholder. He must first obtain the approval of the board of directors, the strategic committee, or the other shareholders of the company, depending on what is provided for in the agreement.
The intellectual property clause
This clause requires shareholders to assign to the company their economic copyright in creations, innovations, software, content, databases, designs, methods, documents, and developments produced in the course of the company's activities.
Example: all innovations produced by Fati, the company's CTO, are assigned to the startup. They are also registered in the startup's name.
Critical point: if the code, trademark, content, templates, design, or technology remain in a founder's or contractor's name, it can block a fundraising round. Intellectual property must be held by the company that exploits the project.
To protect your trademark, see also our guides on trademark filing at OAPI, in Morocco, and in Tunisia.
Director commitments and the non-competition clause
The non-competition clause prevents shareholders from carrying out an activity that competes with the company's activities for a defined period and within a defined scope.
Example: Khadija commits, for as long as she is a shareholder, to devoting the majority of her time to her role within the startup. She may not hold any employment contract, executive corporate mandate, or service contract outside the company, unless the other co-founders are notified and give their prior approval.
This clause must be drafted carefully to remain proportionate and enforceable. It must not become an excessive general prohibition on working.
The exclusion clause for startup directors
The exclusion clause allows a director-shareholder to be excluded from the company and compelled to sell their shares to the other shareholders in certain circumstances defined by the agreement.
Example: Soumia has deliberately breached her confidentiality and non-competition obligations. She may be required to sell her shares in accordance with the founders' shareholders' agreement she signed.
The good leaver and bad leaver clause
The good leaver / bad leaver clause is designed to retain key directors and shareholders within the company for a defined period. A founder who leaves before that period expires may face penalties, while one who honours their commitment may be treated more favourably.
Example: Souad, a director, is required to remain with the company for 24 months but resigns at month 12. She may be required to sell her shares at an unfavourable price, below market value, if the bad leaver conditions are met.
Other useful clauses
Other provisions may be included in the founders' shareholders' agreement:
- liquidity clause;
- forced exit obligation or drag along clause;
- right of co-sale or tag along;
- governance provisions;
- information and audit rights;
- confidentiality clause;
- non-solicitation clause;
- vesting or progressive share acquisition clause;
- dispute resolution mechanism;
- share valuation rules in the event of departure.
| Clause | Purpose | Risk if absent or poorly drafted |
|---|---|---|
| Pre-emption | Priority for existing shareholders in the event of a transfer. | Uncontrolled entry of a third party into the share capital. |
| Approval | Control over the entry of new shareholders. | Arrival of an unwanted shareholder. |
| Intellectual property | Transfer of creations to the company. | Blocked fundraising or dispute with a founder/contractor. |
| Good/bad leaver | Govern the consequences of a founder's departure. | Absent founder retaining too large a share of the capital. |
| Governance | Define reserved matters and powers. | Strategic deadlock or decisions taken without agreement. |
| Confidentiality | Protect sensitive information. | Disclosure of data, code, clients, strategy, or investor documents. |
What are the consequences of breaching a shareholders' agreement?
What is the remedy for breach of the obligations set out in this agreement between shareholders? In principle, the payment of damages to the affected shareholders compensates for the loss suffered.
In certain cases, courts have ordered specific performance where the conditions are met. But do not rely on litigation to save a poorly drafted agreement. The best protection remains precise clauses, consistency with the articles of association, and anticipation of conflict scenarios.
It is therefore important to negotiate carefully and ensure the agreement is well drafted. If you are unsure how to draft a shareholders' agreement, it is advisable to seek support or have the document reviewed before signing.
Need a shareholders' agreement reviewed?
Have your agreement, governance clauses, exit clauses, founder commitments, and intellectual property provisions analysed before signing.
Have your contract reviewed →How does the founders' agreement make your startup investor-ready?
A well-drafted shareholders' agreement prepares the startup for growth. It does not only protect founders from one another. It also establishes a clear legal foundation before the next stages: signing commercial contracts, filing a trademark, setting up a subsidiary, raising funds, legal due diligence, or welcoming a fund into the capital.
Before a fundraising round, investors will in particular look at:
- who holds the share capital;
- who holds intellectual property rights;
- whether the founders are committed to the project;
- whether founder disputes have been anticipated;
- whether share transfers are governed;
- whether the articles of association, shareholders' agreement, and corporate documentation are consistent;
- whether the company holds its own client, partner, and supplier contracts.
To prepare for this stage, see also our guides on the term sheet, fundraising typologies, company formation, and contract review.
What are the common mistakes in a founders' shareholders' agreement?
The shareholders' agreement is often signed too late or drafted too quickly. This is a mistake. The best time to put it in place is before the real issues become sensitive: first revenues, first strategic client, departure of a founder, divergence of vision, or negotiation with an investor.
| Mistake | Consequence | Best practice |
|---|---|---|
| Signing after the conflict | Positions are already entrenched and negotiation becomes emotional. | Sign at the time of incorporation or as soon as a co-founder joins. |
| Omitting intellectual property | Code, trademark, or content may remain in a founder's name. | Include clear assignment clauses in favour of the company. |
| Using a generic template | Clauses inconsistent with the team, country, legal form, or strategy. | Adapt the agreement to the actual project and applicable law. |
| Failing to plan for a founder's departure | An inactive founder retaining too large a stake in the capital. | Include good leaver, bad leaver, vesting, and buy-back mechanisms. |
| Creating excessive veto rights | The company becomes ungovernable. | Limit reserved matters to genuinely strategic decisions. |
| Failing to align articles and agreement | Contradictions and risk of unenforceability. | Check consistency between articles of association, agreement, and corporate documentation. |
FAQ: founders' shareholders' agreement
Is a shareholders' agreement mandatory?
No, it is not always legally mandatory. But it is strongly recommended as soon as several founders set up a company together, especially in a startup destined to grow, sign contracts, raise funds, or protect intangible assets.
When should the founders' shareholders' agreement be signed?
Ideally at the time of incorporation or as soon as a co-founder joins. The longer you wait, the greater the risk of disagreement — particularly on share capital, roles, intellectual property, and departure conditions.
What is the difference between a founders' agreement and an investor shareholders' agreement?
The two terms are closely related. In practice, a founders' agreement typically governs relations between partners or founders, while an investor shareholders' agreement is more commonly used in joint-stock companies and upon the entry of investors.
Is a shareholders' agreement confidential?
Yes, in principle the agreement is confidential between its signatories. It differs from the articles of association, which are generally filed with a registry and accessible to third parties under the applicable rules.
What happens if a founder leaves the startup?
It depends entirely on what the agreement provides. It may set out a good leaver / bad leaver mechanism, a compulsory transfer obligation, a buy-back price, a vesting period, or specific restrictions depending on the reasons for departure.
Is an intellectual property clause necessary?
Yes. It is one of the most important clauses for a startup. Creations, code, trademarks, content, designs, methods, and innovations developed for the project must be clearly transferred to the company where legally possible.
Can a shareholders' agreement be used in Francophone Africa?
Yes. A shareholders' agreement is highly useful in Francophone Africa, particularly in OHADA companies, in Morocco, Tunisia, Senegal, Côte d'Ivoire, or in projects involving founders, investors, and international partners. It must, however, be adapted to the applicable law and the company's articles of association.
Need to secure a shareholders' agreement or founder contract?
ALF helps you review, structure, and negotiate your agreements, commercial contracts, tech contracts, intellectual property clauses, and fundraising documents.
Have your contract reviewed →Further reading and resources
To go further on the legal structuring of your startup and securing your growth, see also:
- Have a commercial, tech, or founder contract reviewed;
- Set up a company with African Legal Factory;
- Register your trademark with ALF;
- Protecting your trademark at OAPI;
- Protecting your trademark in Morocco;
- Protecting your trademark in Tunisia;
- The term sheet in the fundraising process;
- Fundraising in Francophone Africa: understanding the typologies;
- RCCM Senegal: everything you need to know about the trade register;
- Blockchain in Africa;
- Our articles on fintech;
- Our articles on personal data;
- Subscribe to the ALF newsletter.
