Yes. If your company has more than one shareholder, you need a shareholder agreement. This is not a nice-to-have, and it is not something you should plan to “get around to eventually.” It is one of the first things you should do after incorporating, and every day you operate without one is a day you are exposed to risks that a well-drafted agreement would eliminate.
In The Law for Founders, I state it clearly: the articles of incorporation and company by-laws are not sufficient to protect the interests and expectations of each founding shareholder in a startup. The articles cover the bare minimum required by statute — the corporation’s name, its share structure, and a few basic governance provisions. The by-laws cover internal procedures like how meetings are called and how directors are elected. Neither document addresses what actually matters to founders: who controls the company, what happens when someone wants to leave, how to handle disputes, and how to protect yourself from being diluted, frozen out, or forced into a situation you never agreed to.
What Happens Without a Shareholder Agreement
The best way to understand why shareholder agreements matter is to look at what happens without one. And the most dramatic example I know is the Snapchat story.
In the early days of Snapchat, three people were involved in building the company: Evan Spiegel, Bobby Murphy, and Reggie Brown. Brown was integral to the original concept. He worked alongside Spiegel and Murphy in the early development of the app. But there was no deal papered, no shares issued, no certainty on what exactly Brown owned. When the app started to take off, Brown was pushed out. He had no agreement documenting his ownership stake, no shares in his name, and no legal mechanism to enforce the expectations the three co-founders had discussed verbally.
The dispute ended in a $157.5 million settlement. That is not a typo — $157.5 million to resolve a dispute that could have been avoided entirely with a properly drafted shareholder agreement at the outset. As I write in The Law for Founders, the lesson is clear: negotiate and set expectations right away, and document the agreement. The cost of a shareholder agreement is a rounding error compared to the cost of litigating a co-founder dispute.
Control of the Corporation
One of the most important things a shareholder agreement addresses is who controls the company. Without one, control defaults to whoever holds a majority of the voting shares. And in The Law for Founders, I explain what that actually means in practice: without a co-founder or shareholder agreement, one or more voting shareholders who form a majority can control the company by voting in and out the company’s board of directors. Once they control the board, they control management. They can issue new shares (diluting you). They can bring on new shareholders you have never met. They can control spending, hire and fire employees, take on loans, enter into contracts — effectively everything.
If you hold 49% of the shares and your co-founder holds 51%, you have no meaningful control without a shareholder agreement. Your co-founder can make every major decision unilaterally. A shareholder agreement fixes this by requiring certain decisions to be approved by all shareholders, or by a supermajority, rather than a simple majority. It gives minority shareholders a voice and a veto on the things that matter most.
The 50-50 Problem
Equal partnerships have a different but equally serious problem: deadlock. When two co-founders each hold 50% of the shares and they disagree on a fundamental issue, neither can outvote the other. The company is paralyzed. In The Law for Founders, I discuss several mechanisms for breaking deadlock, including giving the chairman a deciding vote, appointing a third board member, or including a shotgun clause (sometimes called a buy-sell clause) that allows one shareholder to force a buyout.
Shotgun clauses deserve a word of caution. The way they work is that one shareholder names a price and offers to either buy the other shareholder’s shares at that price or sell their own shares at the same price. It sounds fair in theory, but in early-stage startups where the company’s fair market value is difficult to ascertain, or where only one of the founders has the technical ability to operate the business, a shotgun clause can be deeply unfair. The wealthier founder can name a lowball price and effectively force the other founder to sell. This is a provision that needs careful drafting and should be tailored to the specific dynamics of the founding team.
If you are in a 50-50 partnership and do not yet have an agreement in place, this is something you should address immediately. Book a free consultation and we can talk through the best approach for your situation.
Anti-Dilution and Share Issuance
Without a shareholder agreement, the board of directors can issue new shares at any time, diluting existing shareholders. If you hold 50% of the company and the board issues a large block of new shares to a new investor or even to another founder, your ownership percentage drops — and with it, your voting power, your economic interest, and your influence over the company.
A well-drafted shareholder agreement includes provisions requiring that no additional shares can be issued without a duly passed board resolution and, in many cases, the unanimous consent of all founders. This gives minority founders veto power over dilution. Some agreements also include pre-emptive rights, which give existing shareholders the right to participate in any new share issuance on the same terms as new investors, allowing them to maintain their ownership percentage.
Vesting
Vesting is one of the most important provisions in a shareholder agreement for early-stage companies. The concept is simple: even though founders receive all their shares upfront, the corporation retains the right to repurchase unvested shares if a founder leaves the company before the vesting period is complete. This is known as reverse vesting.
The typical structure is a four-year vesting schedule with a one-year cliff. This means that if a co-founder leaves within the first year, the corporation can repurchase all of their shares (typically at the original subscription price). After the first year, shares vest monthly or quarterly over the remaining three years. If a co-founder leaves after two years, they keep half their shares and the corporation can repurchase the other half.
Vesting protects the remaining founders if someone leaves early. Without it, a co-founder who works for three months and then disappears still owns their full share of the company. The remaining founders do all the work, but the departed founder keeps all the equity. Vesting aligns equity ownership with actual contribution over time. It is standard practice in startup shareholder agreements, and every co-founder arrangement should include it.
Transfer Restrictions
In The Law for Founders, I make the point that without transfer restrictions, your 49% co-founder could go sell their shares and bring on-board someone you have never heard of. Transfer restrictions are provisions that limit how and to whom shareholders can sell their shares. The most common restrictions include a right of first refusal (giving existing shareholders the first opportunity to buy shares before they can be sold to a third party), board approval requirements, and outright prohibitions on transfers without the consent of all shareholders.
Transfer restrictions are essential for maintaining the integrity of the founding team. A startup is not a public company where shares trade freely on a stock exchange. The identity of your co-shareholders matters enormously, and you need the ability to control who can and cannot become a shareholder in your company.
Drag-Along and Tag-Along Rights
These provisions become important when the company is being sold. Drag-along rights allow a majority shareholder (or group of shareholders holding a specified percentage) to force all other shareholders to sell their shares on the same terms. This is critical for exits — a potential acquirer typically wants to buy 100% of the company, and a minority shareholder who refuses to sell can block the deal entirely without drag-along rights.
Tag-along rights protect minority shareholders by giving them the right to join any sale on the same terms as the selling shareholders. If the majority shareholder negotiates a sale of their shares, the minority shareholders can “tag along” and sell at the same price and on the same terms. This prevents a scenario where the majority shareholder sells their stake at a premium and leaves the minority shareholders behind, potentially stuck in a company now controlled by a stranger.
Death, Disability, and Divorce
These are the three scenarios that nobody wants to think about, but every shareholder agreement needs to address. In The Law for Founders, I call them the three D’s.
On death, a founder’s shares become part of their estate. Without a shareholder agreement, the founder’s heirs — who may have no interest in or knowledge of the business — become your new co-shareholders. A shareholder agreement can include a mandatory buyback provision that requires the corporation or the remaining shareholders to purchase the deceased founder’s shares, typically funded by life insurance. This provides the estate with fair value while allowing the business to continue without disruption.
On disability, a co-founder may no longer be able to contribute to the business. Without a mechanism to address this, you may be stuck with a shareholder who owns a significant stake but cannot work. A shareholder agreement can define what constitutes disability, establish a timeline for triggering buyback provisions, and set out how the shares will be valued and purchased.
On divorce, a co-founder’s spouse may claim an interest in the shares as part of family law proceedings. In many provinces, shares acquired during a marriage are considered family property and are subject to division. A shareholder agreement can require all shareholders to obtain domestic contracts (prenuptial or cohabitation agreements) that exclude the company’s shares from family property, or at least establish a mechanism for dealing with this scenario.
Non-Compete and Non-Solicitation
A shareholder agreement typically includes restrictive covenants that prevent shareholders from competing with the company or soliciting its employees and customers. These provisions protect the company’s competitive position and the value of all shareholders’ investment.
In The Law for Founders, I emphasize that these provisions need thoughtful drafting to narrow down what the company wants to legitimately protect. Canadian courts will not enforce non-compete clauses that are too broad in scope, duration, or geographic reach. A non-compete that prevents a founder from working in “any technology business in North America for five years” will likely be struck down as unreasonable. A well-drafted non-compete identifies specific activities that are restricted, sets a reasonable duration (typically one to two years after departure), and limits the geographic scope to markets where the company actually operates.
Dispute Resolution
Even with the best-drafted agreement, disputes can arise. The question is how they will be resolved. In The Law for Founders, I make the point that courts and the litigation process are often slow, public, and expensive. A shareholder agreement can include mandatory mediation or arbitration clauses that provide faster, private, and often less costly alternatives to going to court.
It is also worth understanding the oppression remedy — a powerful legal tool available under both the CBCA and the OBCA. The oppression remedy is a catch-all remedy that courts can use to consider whether some action the corporation or other shareholders have taken is fair and reasonable. It is designed to protect shareholders from conduct that is oppressive, unfairly prejudicial, or that unfairly disregards their interests. While a shareholder agreement reduces the likelihood of needing to invoke this remedy, it is a backstop that protects shareholders even in situations the agreement does not explicitly cover.
Unanimous Shareholder Agreements
There is a special category of shareholder agreement that deserves mention: the unanimous shareholder agreement, or USA. A USA is not just a shareholder agreement that all shareholders happen to sign. It has a specific legal status under corporate law. A USA restricts the powers of directors and transfers those powers to shareholders. This means that shareholders, rather than directors, make the decisions that would normally fall to the board.
A USA is a powerful tool, but it is not appropriate for every situation. It works best in closely-held companies where the shareholders are also the people running the business day to day. It is less suitable for companies that plan to bring in outside investors who expect a traditional board governance structure. For a full explanation of how USAs work and when they are appropriate, visit our unanimous shareholder agreement page.
“But We Trust Each Other”
This is the objection I hear most often, and it misunderstands the purpose of a shareholder agreement entirely. A shareholder agreement is not a sign of distrust. It is a sign of maturity. You buy car insurance not because you distrust your ability to drive, but because accidents happen. A shareholder agreement works the same way.
The time to negotiate a shareholder agreement is when everyone is getting along, when everyone is excited about the business, and when everyone is motivated to be fair. If you wait until there is a disagreement, the negotiation becomes adversarial, positions harden, and the cost — both financial and emotional — skyrockets. Every founder I have worked with who went through a dispute without a shareholder agreement has said the same thing: I wish we had done this at the beginning.
When Should You Get One?
As early as possible. Ideally, the shareholder agreement is signed at the same time shares are issued to the founders. It should be part of the initial setup of the company, alongside the articles of incorporation, by-laws, and organizational resolutions. The longer you wait, the harder it gets — as the company grows and dynamics shift, the negotiation becomes more complex and the stakes get higher.
We wrote an entire chapter on shareholder agreements in The Law for Founders — grab a free copy for a deeper dive on every provision discussed here and many more.
If you are ready to put an agreement in place, our shareholder agreement services page explains how we work with founders to draft agreements that are practical, thorough, and tailored to early-stage companies. We also have dedicated pages for founders agreements specifically designed for co-founder teams.
Do not wait for a dispute to wish you had done this sooner. Book a free consultation and let’s get your shareholder agreement drafted.