Startup Agreements: Shareholder Agreements, Founder's Agreements, and Rules of Procedure for Startups
Many startups are born out of a spontaneous idea, often among friends, fellow students, or former colleagues. In the euphoria of the early days, product development, customer acquisition, and initial financing rounds typically take precedence. Legal issues are frequently postponed, often under the conviction that "they know each other" and can resolve any problems informally. While this approach is understandable, it carries considerable risk.
A lack of clear contractual foundations can paralyze a young company, especially when it is most vulnerable. A common misconception is believing that the shareholder agreement alone provides a comprehensive set of rules covering all aspects of collaboration. In reality, a shareholder agreement is primarily a formal, legally prescribed foundation that deliberately leaves many operational questions unanswered. If these gaps are not filled by supplementary documents, such as a founder's agreement or rules of procedure, internal conflicts can escalate unchecked, jeopardizing the entire venture.
The Shareholder Agreement – Formal Framework Without Automatic Obligation to Work
The shareholder agreement forms the core of every corporation. For a GmbH or UG, it is a notarized document without which the company cannot legally exist. This agreement contains mandatory legal information, including the company name, registered office, object of the company, the amount and distribution of share capital, and individual shares. Additionally, it often includes individually agreed clauses tailored to the company's specifics.
These clauses might cover pre-emption rights, drag-along and tag-along regulations, liquidation provisions, or special approval requirements for significant business decisions. However, what it does not automatically include—and this surprises many founders—are obligations for active collaboration. The shareholder agreement does not establish any employment law or service contract obligations.
Even if a founder was significantly active operationally in the beginning, they can later withdraw completely from day-to-day business. From a company law perspective alone, this would not constitute a breach of contract. This legal "loophole" can create considerable tension. The team might expect active involvement, while a co-partner might merely await their share of profits. Without supplementary agreements, this situation cannot be prevented or sanctioned, highlighting that the shareholder agreement primarily defines the legal structure, not the operational reality.
The Founder's Agreement – Binding Rules for Operational Cooperation
A founder's agreement is essentially a contract between the founders. It aims to establish binding terms for day-to-day cooperation, work commitment expectations, and strategic direction. Unlike the shareholder agreement, it is not a legally mandated document. Nevertheless, it is an extremely important and practical instrument.
One decisive advantage is that it can be concluded without notarization and can be adapted at any time as the company's needs evolve. A comprehensive founder's agreement extends far beyond mere declarations of intent. For example, it specifies precisely how much time each founder must dedicate to the company, whether full-time, part-time, or project-based, and outlines specific responsibilities.
It can also include detailed milestones for product development, customer acquisition, or the implementation of specific marketing strategies, linking these to contractual consequences. Another key element is the transfer of all resulting intellectual property rights to the company. This prevents future disputes and is particularly essential in technology-driven startups, ensuring that code, designs, or trademark rights do not remain the property of individual founders.
Moreover, a well-designed founder's agreement allows for the introduction of vesting rules. These rules ensure that shares are only finally acquired gradually and contingent on the founder's active involvement or achievement of agreed targets. This protects the company from a scenario where an inactive founder retains a large shareholding long-term without contributing. Investors often view the absence of such regulations as a considerable risk. Ultimately, a founder's agreement can also include provisions for conflict resolution, such as mediation procedures or binding arbitration clauses, to avoid lengthy legal disputes.
The Rules of Procedure – Institutional Procedures and Decision-Making Processes
Rules of procedure complement the shareholder and founder agreements by defining internal procedures and decision-making processes at an institutional level. They are particularly relevant for management but can also structure the cooperation of shareholders within the shareholders' meeting. In many cases, rules of procedure are adopted at the shareholders' meeting, making them easier to adapt than notarized articles of association.
These rules can precisely define the areas of responsibility for individual managing directors, which transactions require their prior approval, and how reporting obligations to shareholders are structured. They regulate meeting frequency, invitation deadlines, and resolution documentation. Such clear structures prevent misunderstandings, shorten decision-making processes, and provide security, especially as the company grows or new shareholders join.
The key difference from the founder's agreement is that rules of procedure do not primarily concern the personal performance of founders. Instead, they focus on the functioning of the company's bodies. While a founder's agreement regulates what individual founders must achieve as persons, the rules of procedure create an institutional framework within which these achievements are translated into entrepreneurial action.
Typical Errors and Their Consequences
One of the most serious mistakes is the assumption that the shareholder agreement automatically contains all relevant obligations and expectations. This leads to operational gaps that remain unaddressed. In practice, this often means a founder who no longer wishes to be actively involved can remain a full shareholder. This can demoralize the remaining founders and create significant problems when seeking investors.
Another common omission is the lack of regulations concerning the transfer of intellectual property. Particularly in the tech sector, it is crucial that all work results—whether source code, databases, designs, or brands—are automatically transferred to the company. Without clear regulations, an individual founder might retain certain core rights after leaving, which could jeopardize the entire business model. Similarly problematic is foregoing vesting rules or regulating them superficially. This can result in someone receiving shares upfront and retaining them permanently, even if they leave the company after a short period.
A third error occurs when the various documents are not coordinated with each other. If the shareholder agreement contains one regulation but the founder's agreement dictates something different, conflicts of interpretation arise. These conflicts can lead to lengthy legal disputes. Investors also become skeptical when contradictory provisions exist, often demanding costly adjustments before providing capital. Addressing these common legal mistakes early is crucial.
Relevance for Investors
Investors view a clear and consistent contract architecture as a sign of professionalism and long-term planning. They not only verify the formal correctness of the shareholder agreement but also want to ensure operational obligations are clearly regulated. Furthermore, they check whether intellectual property is secured and if a fair incentive system for founders is in place.
The existence of a detailed founder's agreement and well-functioning rules of procedure can determine whether an investment is made. In the absence of such regulations, investors immediately raise critical questions:
- What happens if a founder leaves?
- Who owns the core rights?
- Who makes decisions in critical situations?
- How are conflicts resolved?
The clearer these points are regulated, the lower the perceived risk. This, in turn, makes an investor more willing to invest in the company. Therefore, legal preparation for investment rounds is paramount.
Conclusion: Three Levels for a Stable Foundation
A stable startup relies not only on a great idea and a strong team but also on a solid legal and organizational foundation. The shareholder agreement provides the necessary legal framework. The founder's agreement ensures clear operational obligations and mutual expectations, while the rules of procedure guarantee that corporate bodies can work efficiently.
Founders who establish all three levels properly at an early stage can avoid later conflicts, save costs, and build trust among investors, employees, and business partners. The decisive advantage is that founders can then focus their energy on growth and innovation rather than arguing about fundamental issues of cooperation during times of crisis.