Summary
- A funding round usually relies on a subscription agreement to record the investment and a shareholders’ agreement to govern the company afterwards, often combined into one investment agreement.
- These documents sit alongside the articles of association and set out investor protections including information rights, consent matters, board rights and warranties.
- The terms need careful negotiation so investors get the protection they expect while founders keep day-to-day control.
- This guide explains subscription and shareholders’ agreements for founders raising investment in the UK.
- LegalVision’s business lawyers specialise in advising clients on funding round documents.
Tips for businesses
Before you sign, map every investor consent matter against your day-to-day decisions and push back on anything that would stall normal trading. Check who gives the warranties, especially if founders are asked to give them personally. Make sure the agreement matches your articles of association.
A shareholders’ agreement is a private contract explaining how a company is run and how its shareholders deal with one another. In a UK funding round, it usually sits alongside a subscription agreement, which records the investment itself, and the company’s articles of association under the Companies Act 2006. Together these documents admit the investor as a shareholder and define everyone’s rights after completion. Investors use them to secure protections such as information rights, consent matters, board representation and warranties. Founders use them to keep the operational control they need. Getting the balance right early can also make your business more attractive to later investors. This article provides a high-level introduction to subscription and shareholders’ agreements and their relevance in a funding round.
What Is the General Purpose of a Shareholders’ Agreement?
Companies are governed by company law and their constitutional documents, such as the articles of association. The articles are the internal rule book for how the company operates. Shareholders of private companies often want to deal with matters that go beyond the articles. A shareholders’ agreement lets them do that. It is not legally required, but most private companies use one.
A shareholders’ agreement regulates the relationship between shareholders. In some cases it also regulates the relationship between the shareholders and the company. It sits on top of company law and the articles of association.
How Do Shareholders’ Agreements Work in an Investment Context?
A company might raise funds for many reasons. An investment round can provide that funding, but you need formal agreements to secure the investor’s commitment and bring them in as a shareholder.
Raising investment usually changes ownership and control. New investors expect protection over key decisions and visibility into how the business operates. Founders usually want freedom to run things day to day. Investors usually want safeguards around major decisions.
A shareholders’ agreement helps you manage that shift. It balances investor protections against the flexibility founders need.
This guide will help you to understand your corporate governance responsibilities as a director, including the decision-making processes
What Is a Subscription Agreement and a Shareholders’ Agreement?
A subscription agreement records the terms of the investment. It explains the amount of investment, issued shares and necessary conditions before completion. It makes the investor’s obligation to invest legally enforceable.
A shareholders’ agreement is a contract between shareholders. It explains the operations of the company after completion. It usually covers decision making, share transfers, exits and future funding.
Many funding rounds combine both in a single document. Even when combined, the document still does two distinct things: it records the investment and it governs the relationship after completion.
This combined document is called a shareholder and subscription agreement, or an investment agreement. The company, the incoming investor and sometimes the existing shareholders all sign it.
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What Clauses Are Typically Found in Such Agreements?
Every investment is different, but funding round agreements tend to cover the same themes.
Conditions
Completion can depend on certain conditions being met. These often include satisfactory due diligence and board and shareholder resolutions approving the issue of shares or other equity securities. Conditions commonly include changes to the articles of association. Investors may also require new management service agreements.
Information rights
Investors often ask for information rights so they can monitor their investment. This usually means receiving financial and business updates.
The question is how much information the investor needs. Reporting should let them monitor the business without becoming a burden on founders. You need to strike a careful balance.
Investor consent matters
Investors usually have little involvement in day-to-day decisions. Instead, they get protection through investor consent matters.
These require investor approval before the company takes certain actions. Common examples include issuing further shares or taking on debt.
Investors will expect these rights. But the list should not be so long that the company has to ask for approval too often. Too many consent requirements can slow the business down.
Board rights
Directors run the company day to day. Investment agreements often deal with board composition. Investors may want the right to appoint a director or a board observer. Founders often want to keep board control, especially in early-stage companies.
Warranties
Warranties are statements about the company and its business at the time of the investment. If a warranty is wrong, the investor may have a claim.
The scope of warranties depends on factors such as how long the company has been trading. A start-up may give more limited warranties than an established company.
Think carefully about who gives the warranties. Investors may ask founders to give warranties personally. That increases the risk founders carry, so weigh it up properly.
Share transfers and leaver provisions
A shareholders’ agreement also controls what happens to shares, which matters most when a founder leaves. Most agreements include pre-emption rights, so existing shareholders get first refusal before shares are sold to an outsider. They often include drag-along and tag-along rights. Drag-along lets a majority require minority shareholders to join a sale, so a buyer can acquire the whole company. Tag-along lets minority shareholders join a sale on the same terms, protecting them if the majority exits.
Founder shares are often subject to leaver provisions. These set out what happens to a founder’s shares if they leave the company. A good leaver may keep some or all of their shares. A bad leaver may have to sell them, sometimes at a reduced price. Investors usually expect these terms, because they protect the value tied to the founders staying involved. Agree the definitions of good and bad leaver early, as they directly affect what you walk away with.
Other clauses will also feature in these agreements. A corporate lawyer can explain what they mean in practice.
Why Is Legal Advice Important for Funding Documents?
Subscription and shareholders’ agreements set the framework for the investment and the investor’s ongoing rights. They matter because they decide how the company is governed after completion.
You need to understand and be comfortable with the terms you agree to. The agreement must reflect what you actually agreed with your investor.
A funding round usually involves several documents. These often include updated articles of association, disclosure letters, and board and shareholder resolutions. Key people may also sign new service or employment agreements.
The subscription and shareholders’ agreement must line up with the articles of association and the other documents. Poor drafting or inconsistencies can delay a round, restrict future funding, or create uncertainty and disputes later.
Key Takeaways
Raising investment is a big step, and it needs clear, commercially workable documentation with your investor. Subscription and shareholders’ agreements help secure the investment and govern how the company runs after completion.
Information rights, consent matters, board rights and warranties are the terms that need careful balancing and negotiation. Your agreements need to satisfy investors while preserving the operational flexibility you need as a founder. A corporate lawyer can support you through the negotiation and drafting in your funding round.
LegalVision provides ongoing legal support for businesses seeking investment through our fixed-fee legal membership. Our experienced corporate lawyers help businesses manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Do I need a subscription agreement and a shareholders’ agreement for my funding round?
In most cases, both are required. Investors typically expect a subscription agreement to record the investment and a shareholders’ agreement to govern the company after completion.
How can a lawyer help with my funding round?
A corporate lawyer can draft or review the funding documents and explain the practical effect of any ongoing investor rights, so you understand and are comfortable with them. They can also negotiate the documents on your behalf. Legal advice helps the documents read correctly and reduces the risk of delay or future disputes.
What is the difference between a subscription agreement and a shareholders’ agreement?
A subscription agreement records the investment: how much is invested, what shares are issued and the conditions before completion. A shareholders’ agreement governs how the company is run afterwards, covering decision making, share transfers, exits and future funding. Funding rounds often combine both in one document.
What are investor consent matters?
Investor consent matters are actions the company cannot take without investor approval. Common examples include issuing further shares or taking on debt. They give investors protection over major decisions without involving them in day-to-day management. The list should not be so long that it slows the business down.
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