Shareholder pact in start-ups: what to do and, above all, not to do

Posted on Oct 7, 2022, 7:50 am

Like any self-respecting entrepreneur, a start-up boss is not very fond of administration and legal affairs. However, neglecting the content of certain documents can be costly. The shareholders pact, or pact of partners, is a good example of this, as it governs the relationship between partners and investors. In this period of more difficult germination conditions, it is even more important to pay attention to this.

Before diving headfirst into the conditions and small clauses of the shareholders’ agreement, it is necessary to be accompanied. “Being advised by a specialized lawyer is essential. You can find many lawyers who do business law but know nothing about shareholder agreements for start-ups that raise funds with VCs. [fonds de capital-risque, NDLR] », highlights Pierre-Antoine Dusoulier, CEO of Ibanfirst, an international payment platform for SMEs and business angels.

“Many entrepreneurs outsource this part to fundraisers, but this is not the right approach. Better go see a lawyer used to doing business, not necessarily a rock star”, adds Frédéric Montagnon, multi-entrepreneur and business angel.

The rise of French Tech in recent years has given rise to specialized technology companies and pressured existing ones to create departments exclusively dedicated to start-ups.

imagine the worst

Once the lawyer is chosen, the founder must keep in mind that he will have to make concessions. “Bringing investors into equity doesn’t just mean getting a check, it’s giving rights to others,” underlines Charles Degand, co-founder of the Angelsquare business angel community.

Another rule to keep in mind before creating the pact: imagine the worst. What happens if a partner leaves the company? If he becomes incapacitated? If he dies? “There are no good or bad rules, but you have to plan,” says Frédéric Montagnon. And to add: “Anyway, you can’t leave 30% of your business to someone who is no longer there. »

Whether the first round brings in one or several dozen investors, it’s not necessarily useful to include all of them in the shareholders’ agreement, according to Louis Oudot de Dainville, a partner at Gide.

“To avoid having too many people in the pact and get everyone to agree to change something, we recommend creating separate mini pacts. For example, limiting the pact to founders and 10 investors, then putting employees and small entrepreneurs into mini pacts”, explains the lawyer. But business angels still have to accept… “This necessarily gives them less rights,” adds Louis Oudot de Dainville.

The governance game

The lawyer also draws the attention of entrepreneurs to the investment funds of large companies. “When a corporate investor enters the capital, we forget to include confidentiality and conflict of interest clauses so that the company does not use the technology of the start-up for its activity”, indicates Louis Oudot de Dainville.

Governance issues occupy a lot of space in the shareholders’ agreement, especially the composition of the board of directors. The collective The Galion Project recently released a guide on the subject. “We must avoid an asymmetry between investors who are used to being on boards and founders who are in their first box. Echos” Jean-Baptiste Rudelle, co-founder of Galion.

beware of the exit

The life of a start-up is certainly punctuated by the entry of new investors but also by exits (partial or total in case of sale). There are more or less binding exit clauses (transfer in five years, for example) or the appointment clause, which establishes a date on which the partners commit to seeking liquidity. Exit conditions are revised each time new investors enter.

“Even the most experienced businessmen don’t know all classes of action. However, you should know that seed shares do not give the same rights as series D”, says Pierre-Antoine Dusoulier, in reference to preferred shares, i.e. bonds with specific rights, such as redemption right or priority redemption.

“When a valuation is too high, it means investors will use themselves first,” warns Charles Degand. And if the valuation is lower than expected, the founders can walk away… with nothing.

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