Dealing With Investors

10 mins • 25 Jan 22

Dealing With Investors

Securing significant investment is crucial for a startup business’s development and survival. Entrepreneurs shouldn’t be afraid to hold out for the right deal on the right terms. Businesses should make sure that the legal language in any transaction documentation doesn’t create long-term problems. In this article, we’ll be covering some key points to note regarding shareholders agreements with dealing with investors.

What Is A Shareholders’ Agreement?

The importance of the Shareholders’ Agreement is undisputed in setting out the rights and obligations of shareholders in a company. A well drafted shareholders’ agreement has multi-fold capability as it establishes the rights of the shareholder, protects their investment in the company and governs how the company is managed.

As your start up is likely to have more than 1 founder, having a shareholders’ agreement can help you to seal the specific rights and obligations of you and your founder(s) and set out the percentage of ownership shares that have been assigned. In this article, we’ll share with you the basic insights that can allow you to harness the business-enabling potential of having a Shareholders’ Agreement and give you piece of mind in ensuring your rights as Founder are safeguarded.

10 Benefits Of A Shareholders’ Agreement: Why Do YOU Need It?

1. Sets out Expectations

Stipulating shareholders’ rights and responsibilities will allow all shareholders to be on the same page and provide them with a good understanding of what they’re buying into.

2. Protects Shareholder Rights

A well drafted Shareholders’ Agreement will set out the rights and obligations of all current shareholders, offering enhanced protection to you and your shareholders in the event that a decision is made to offer new shares to a third party.

3. Diminishes Disputes

No relationship is perfect, even amongst Shareholders. A comprehensive Shareholders’ Agreement can help to clearly set out the terms and procedures such that shareholders are in agreement. Any arising disputes will be dealt with in the dispute resolution procedures agreed among shareholders, preventing the need for gratuitous legal action.

4. Regulating the raising of capital for your startup

A reliable Shareholders’ Agreement can endear you to investors by setting out specific investor rights and granting enhanced investor protection.

5. Increase Company’s Competitiveness

Your Start up’s competitiveness can be protected and even increased through the use of restrictive provisions like confidentiality and non-competitive obligations accounted for in your shareholders’ agreement.

6. Privacy

Unlike the company’s constitution, the Shareholders’ Agreement will remain private and confidential and cannot be accessed by creditors or employees. This element of privacy would also allow for sensitive commercial details to be included in the Shareholders’ Agreement.

7. Protection of Minority Shareholders

Minority shareholders can better negotiate and protect their rights as an amendment to the Shareholders’ Agreement can only be carried out with the agreement of all shareholders party to the Agreement. In contrast, a company’s constitution can usually be amended with a 75% majority, marginalising minority shareholders.

8. Exit Strategy

Should the shareholders “fall out”, the Shareholders’ Agreement can regulate issues such as share valuations and rights to pre-emption in departing shareholders. This would ultimately reduce the conflict between the shareholders and prevent the stagnation of the company during such an exit.

9. Company Financing

The Shareholders’ Agreement will outline the manner in which the company will be financed (Debt & Equity financing).

10. Company’s Dividends

The Shareholders’ Agreement can settle the dividend policy of the company. Issues such as when the dividends will be payable in addition to reinvestment options in lieu of a dividend payable can be established.

Confidentiality

Startups may be required to disclose a wide range of confidential information to their personnel, as well as to their own service providers and business partners. Such confidential information could be extremely valuable to the business - they may entail trade secrets or novel ideas. Indeed, the value of such confidential information often lies in the very fact that they are confidential.

Yet, Startup owners may fail to take adequate steps to protect the confidentiality of such sensitive information, and this could lead to a massive erosion of profits.

Document Confidentiality Obligations Clearly

Startups may be required to disclose a wide range of confidential information to third parties, including their personnel, service providers and business partners. Such confidential information could be extremely valuable to the business - they may entail trade secrets or novel ideas. Indeed, the value of such confidential information often lies in the very fact that they are confidential.

It is thus key for Startups to document such confidentiality obligations clearly, so that such confidentiality obligations are lent enforceability.

What's Next?

When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.

We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.

*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion. 

Observations and Tips

Prepare Proper Legal & Financial Documentation: Investors expect organised corporate, financial, and compliance records during due diligence.
Use Clear Investment Agreements: Shareholders agreements, subscription agreements, and SAFE or convertible instruments should be carefully drafted.
Understand Investor Rights Before Fundraising: Voting rights, board seats, veto powers, and liquidation preferences can significantly affect founder control.
Maintain Accurate Cap Table Management: Clear ownership records are essential for investor confidence and future fundraising rounds.
Protect Founder Interests Strategically: Founders should balance investor protections with operational flexibility and long-term control.
Disclose Risks & Business Information Transparently: Incomplete or misleading disclosures can create liability and trust issues with investors.
Align Governance Structures Early: Board composition, approval processes, and reserved matters should be structured carefully.
Protect Intellectual Property Ownership: Investors will closely examine whether key IP is properly owned and protected by the company.
Use Professional Communication & Reporting: Regular updates and structured investor communication improve trust and relationship management.
Review Dilution & Exit Implications Carefully: Funding terms should be assessed for long-term ownership and exit consequences.
Avoid Informal Investor Arrangements: Handshake understandings and undocumented promises often create major legal and commercial disputes.
Prevent Reactive Fundraising Management: Poorly structured investment arrangements can complicate governance, scaling, and future funding rounds.