Introduction

As a seasoned SEO and expert in startup legal matters, I frequently encounter common mistakes that startup founders make when creating their first Shareholder Agreement (SHA). One frequent oversight is the reliance on a friend who is not a legal specialist. Just as you wouldn't consult a cardiology expert for an eye ailment, specialized legal knowledge is crucial for drafting an SHA. This article highlights these pitfalls and offers valuable insights to help founders navigate the often complex world of startup legal.

The Importance of a Specialized Lawyer

A common mistake among startups is to turn to a lawyer friend instead of hiring one with specialized experience in drafting Shareholder Agreements for startups. While it might seem cost-effective, the expertise required for drafting an SHA is intricately specific. Founders often underestimate the depth of their own ignorance, much like patients underestimating their own health issues. A specialist lawyer can walk you through the terms and clarify any confusion, ensuring that you understand everything that you are signing.

Understanding the Terms

When adding a term of the SHA, it's crucial to not rush through the document. Founders often emphasize getting funding over understanding the terms they are signing. This is a significant risk as the terms in the SHA will be vital when you seek further funding. Startups must fully comprehend the key terms and should know them by heart, as they will play a critical role in future fundraising efforts.

Don't Assume Delegation

Many founders assume that other investors will take on the responsibility of reviewing the SHA, but this is a dangerous assumption. It is highly likely that the other investors will have their own lawyers and will ensure that the terms are fair. Additionally, experienced investors have likely dealt with numerous SHA documents, giving them a better understanding of the terms. You should not assume that they will be less thorough than your due diligence.

The Impact of Misaligned Terms

The terms in a Shareholder Agreement can significantly influence your start-up’s future. A poorly drafted document can lead to misunderstandings, conflicts, and, in severe cases, the loss of control over your company. Founders must not draft a document that is highly advantageous to them without understanding the implications. If any investor is unhappy with the terms, it could sour the relationship and impact future funding opportunities.

Adhering to Standards

In the United States, the NVCA (National Venture Capital Association) standard is often cited as a benchmark for term sheets and SHA documents. Although street deals may deviate from these standards, any investor worth their salt would prefer to work with terms aligned with NVCA guidelines. Founders need to understand the basic standards and know how to tailor the document to fit their specific needs while adhering to these standards.

Professional Help is Critical

Asking for advice on general legal matters online is not a substitute for professional legal advice. If you find yourself stuck with vague questions or lack of understanding, it is advisable to invest in a professional legal team. They can guide you through the complex legal processes and ensure that you are protected, which is critical for the success of your startup.

Conclusion

Your startup's success hinges not only on your product or service but also on how well you handle the legal aspects of running a business. A well-drafted Shareholder Agreement can be the difference between a smooth journey and a rocky road. By hiring a specialist lawyer, understanding the terms, and not assuming that others will review the document, you can set your startup on a path to success.