question for other startup founders – did you create a shareholder agreement when you incorporated your startup ?
Basically, we are incorporated – but are getting on to the seriously confusing task of our initial startup paperwork. One of the things we are getting done right now is agreements for our advisors. However, as I understand the next step needs to be the shareholder agreement.
Did it include the stock pool/ESOP plan within it as well as the founder stock grant articles + Capital structure ? I referred to [1] but did not find a lot of information. In fact I’m getting conflicting information – some say that a SHA is good to have before seed funding in order to establish the stock pool as well as things like drag along and tag along rights. But not entirely sure what all needs to be covered as a best practice.
I also read Alok’s “6 dangerous bombs” topic and want to be doing the right thing.
[1] https://www.ibanet.org/Document/Default.aspx?DocumentUid=9BF2D0C5-615F-494A-87EB-A29D1451B188
asha chaudhry
sandeep – there is a similar ASK recently – use the search engine or just go through the ASK section and check out the comments.
also, you may find these helpful –
https://www.therodinhoods.com/forum/topics/alok-on-cnbc-s-rules-of-the-startup-game
https://www.therodinhoods.com/forum/topics/esops-for-startups-by-rodinhood
https://www.therodinhoods.com/forum/topics/comic-nda-obsessions
sandeep
Hi asha, thanks for replying. Actually, my question goes beyond the knowledge around incorporation, esops and term sheets. My question is very specific around the set of legal documents and their contents at this point in existence.
We have a fairly good lawyer, however there is a lot of FUD around the specific documents that need to be created.
For example, Founders Institute has a set of preseed documents – but nothing that pertains to India.
So the question is – what documents and should we build our pool right now?
asha chaudhry
in that case reach out to rahul dev – he is a lawyer based in delhi and is most helpful on trhs for such advice.
https://www.therodinhoods.com/profile/RahulDev
Rishi
Sandeep – I’m no legal expert, but don’t think having a SHA is mandatory in India. Take a look at these documents, they might be useful and may answer some of your questions.
https://bestengagingcommunities.com/startup-documents/
In our case we basically decided not to do a proper shareholders’ agreement till certain critical events occurred (one of them was raising external funds). Keep in mind most of these agreements are executed in good faith; the idea is they can be used only when things go really really wrong. On the other hand, there is only so much you can cover in these documents; For example: use of words like “will” vs. “may” makes or breaks an argument in cases.
Personally, I’m not a big fan of spending days + money on these documents before you raise funds. However in order to establish an agreement and safe guard the interests of all stakeholders, we basically executed an “interim” agreement between the parties (co-founders, advisors) involved. For example, when I brought an advisor on board, we signed a mutual agreement where we basically said the advisor will be granted x% of common stock (NOT # of shares etc.) on successful completion of certain services over a certain duration. Clauses in the document included — effective dates, vesting period, cliff, dilution, description of services, voting rights (which were none in case of advisor), non-disclosure, and non-compete etc.
But that’s just me…I just wanted to keep things simple at this stage, and at the same time be clear on who’s getting what so that there’s no conflict later on. Hope this helps.
Abhyudaya Agarwal
You don’t need to even think of a shareholders agreement until an investor has shared a termsheet to invest in your company. Capital structure and ESOP pool are created in the SHA for the purposes of clarity for investors, and so that they know how much equity will be issued to key employees. The size of the pool is a business decision that can be decided by founders alone (and adjusted, if necessary during negotiation with investors). No special provisions need to be made until you are negotiating an SHA for signing.
You can find some pointers for negotiating an SHA here – https://www.nextbigwhat.com/negotiating-sha-shareholder-agreement-297/
Have you promised equity to advisors? Is it because of them that you are thinking of having an SHA?
I am assuming you have a valid company incorporation – in that case, you will already have articles of association in place. Most companies have a very boilerplate version. If you want to make significant changes to the way your company works (e.g. impose some kind of commitments on co-founders), you can do that by amending these articles.
You can write to me at abhyudaya@ipleaders.in or reply here if there’s an issue.
(I worked on private equity investments and exits as a deal lawyer earlier and now teach business law to entrepreneurs, managers and working professionals across the country)
Alok Rodinhood Kejriwal
This is inspiring.
Let me work with my CFO to host a set of REAL LIFE shareholding and share subscription agreements
in the meanwhile, if you have specific issues, mail me – alok@rodinhood.com – I can sit with you and walk through the contentious issues
sandeep
@Alok – thanks for the offer. I will be emailing you and probably get into a call (I’m based out of Delhi and you are probably in Mumbai).
@abhyudaya and @rishi- thanks for the replies. AFAIK – the SHA is a better version of the founders agreement. The only thing is that you will spend maybe 10k on the SHA, but I think it is worth it. Especially for us since we are putting in quite some money during bootstrap stage (@alok – actually that is one of the things we wanted to talk about) and the question arises on how to account for it.
I know all of these get superseded when an investor comes in, but I think it shows the investor that you are smart enough to care about these things and that sets the stage for negotiation.
@alok – one of the interesting things that I saw Mobstac’s open sourced convertible note documents (https://www.nextbigwhat.com/convertible-note-template-297/). The ecosystem is so much better in the US, where you have this whole bunch of SHA, etc. templates (e.g. https://www.docracy.com/7eve9t8f13/shareholders-agreement-ppdd)
Abhyudaya Agarwal
@ sandeep – I didn’t suggest a co-founders agreement because in India that will be helpful in extremely early stages (largely prior to incorporation) – in US of course these are used for different context. In India however, you will need similar safeguards (which are included in the co-founders agreement) to protect your startup against risks that can arise from co-founders leaving, underperforming or there being a breakdown in co-founder relationships – e.g. reverse vesting, intellectual property assignment, etc., but these must, as a rule be included in your articles. As I said earlier, a boilerplate version of articles don’t include these restrictions, so you can take these from the co-founders agreement.
For the paperwork, all you need to ensure is that you have a clean capitalization table – that is, those who have provided you money so far have clearly determined equity stakes (if you are providing them equity, else you can treat it as a loan and repay them when you have cash) and have issued shares to them of corresponding value, so that an incoming investor is assured that there will be no future dispute over the shareholding he gets in the company.
Don’t worry so much about documentation – an SHA exists independently until procedural formalities are completed – post that, all those requirements are incorporated in the articles. In your case, since all of you are founders, you can incorporate these directly into your articles – having an extra document for no reason is a waste of time.
It will be a good idea to enter into employment agreements with the company – even if you don’t take a salary, you can have a claim against accrued salaries in the past, which can be taken from future cash of the company, at the worst case, this can be one of the little negotiating points against investors.
From an investors perspective, they don’t really care about employment agreements before they come in – these will be entered into post investment anyway if they are not there at the time of investment. If they are, investors may request modifications to them to ensure that you are fully committed to the company.
The diploma course we conduct with NUJS offers a number of templates and insights on negotiation and legal strategy. You can see the syllabus here: https://startup.nujs.edu/course-syllabus.php (takeaways are listed under each module). A free demo which has access to 23 curated study materials, templates and videos can be seen here: https://startup.nujs.edu/register.
For your convenience, I am sharing a co-founders agreement here – but this one will be useful for extremely early stage startups). Take a look.
You can write to me at abhyudaya@ipleaders.in or call on 9717301797. I am based in Delhi.
sandeep
@abhyudaya – thanks for that info.
Question – we were thinking of showing deferred salaries (based on last drawn salary) in our cap table, but someone advised us that it needs to be shown as a loan to the company and there are TDS implications. Is that correct ?
Furthermore, the popular notion seems to be that investors typically shoot down deferred salaries – I’m not sure if that is correct or not.
Abhyudaya Agarwal
Yes there will be TDS implications if it’s a salary – company must deduct TDS on salaries at the time of payment or when it is due, but if your salary is below the minimum tax slab (as is the case for many founders) then you won’t have those tax implications.
Showing it as a loan will not have that issue – all the personal money and assets you have provided to the company can of course be claimed back. How do you claim more than that? You can treat deferred salaries as a loan if your CA can show additional assets or cash as having come from you into the company, equal to the amount of deferred salaries.
Investors will want to shoot them down – but that’s a negotiation issue. Being reasonable is important – if you have never drawn any money from the company, an investor is more likely to understand, right? Even if you allow it to be shot down, it is ‘one more thing’ you will give away to investors, and in a negotiation setting, if you give it the right away, it will allow you to take something else in return, even though it’s small, right? You will be able to do this if you understand how different clauses in SHAs work together. I will share a basic video here:
https://www.nextbigwhat.com/negotiating-sha-shareholder-agreement-297/