Shareholders' Agreement (SHA)

A legally binding contract between a company's shareholders (founders and investors) that governs their relationship, rights, and obligations — separate from and in addition to the company's Articles of Association.

The SHA translates the commercial terms from the term sheet into enforceable legal obligations. Protective provisions are often the most consequential clause for founders day-to-day — they list which company decisions can't be made without investor consent, and an overly broad list can slow down routine operations, since even mundane decisions might technically require investor sign-off. Drag-along rights let majority shareholders (often including investors, once they hold enough combined voting power) force minority shareholders to sell their shares in an acquisition, ensuring a buyer can acquire 100% of the company rather than being blocked by a holdout. Tag-along rights work the other way, letting minority shareholders join a sale on the same terms if a majority shareholder sells. Founders' shares are typically also placed under vesting and lock-in provisions within the SHA, meaning a departing founder before their shares fully vest forfeits the unvested portion — protecting the company and other shareholders from an early departure.

1. Read the protective provisions list carefully and negotiate to keep it focused on genuinely material decisions (large fundraising, major asset sales) rather than routine operational matters. 2. Understand your own vesting and lock-in terms as a founder — reverse vesting on founder shares is standard and protects the company if a co-founder leaves early. 3. Check the drag-along threshold (what percentage of shareholders needs to agree to force a sale) — a very low threshold can let investors force an exit founders don't want. 4. Negotiate information rights that are proportionate to the round size — extensive monthly reporting obligations can be a real operational burden for a small team. 5. Have an experienced startup lawyer review the full SHA, not just the term sheet — the SHA is where the enforceable details live.

A Series A SHA gives the lead investor a board seat and requires investor consent for any single expenditure above ₹50 lakh, any new equity issuance, and any change to the company's core business. Eight months later, the founders want to raise a small bridge round from existing investors to extend runway — because "any new equity issuance" needs investor consent under the SHA, they must formally seek board approval, even though the same investors are the ones providing the bridge capital.