What is a shareholders’ agreement, and do startup founders need one?
A shareholders’ agreement is a private contract between a company’s shareholders that sets out how the company will be owned, governed, and how key decisions will be made.
It is not legally required, but for startups with more than one shareholder, it is a practical tool for managing risk and avoiding disputes as the business grows.
Why this matters for startups
In the early stages, founders are often shareholders, directors, and sometimes employees. Decisions can feel informal, and alignment between founders is often strong. However, as soon as money, growth, or new people are involved, expectations can diverge.
A shareholders’ agreement provides clarity upfront, and helps everyone agree on key matters while relationships are strong and incentives are aligned.
What is a shareholders’ agreement?
A shareholders’ agreement is a private contract between shareholders that typically covers key commercial and governance matters such as:
- how shares can be issued, sold or otherwise transferred
- what decisions require shareholder approval
- how deadlocks are resolved
- what happens if a founder exits or stops contributing
- protections for minority shareholders.
Because it is a contract, it only binds the parties who sign it and is not publicly filed.
What issues can a shareholders’ agreement help to avoid?
A shareholders’ agreement is most valuable in preventing disputes that arise as a company grows or changes. It can reduce uncertainty and conflict where there are multiple founders and shareholders contributing in different ways and the company needs to:
- raise capital
- make major decisions
- deal with an unexpected exit.
At these points, informal understandings can quickly break down, and a shareholders’ agreement provides a clear framework for handling matters before problems arise.
What is the difference between a shareholders’ agreement and a company constitution?
The key differences are:
- A constitution is a public document that sets out the company’s core rules and applies to all shareholders.
- A shareholders’ agreement is private and more flexible. It can deal with commercial arrangements, investor protections, and founder-specific issues in greater detail.
In practice, the two documents are often designed to work together, with the constitution covering baseline rules and the shareholders’ agreement addressing relationship and control issues.
FAQs
Is a shareholders’ agreement mandatory in New Zealand?
- A company can operate without one, but many choose to adopt one for clarity and risk management.
Does a shareholders’ agreement override the Companies Act?
- It must operate within the framework of the Companies Act and cannot contract out of mandatory legal rules.
Do all shareholders need to sign it?
- A shareholders’ agreement only binds the parties who sign it. That said, in early‑stage startups it is common for all shareholders to be parties to the agreement, so that everyone is working from the same set of rules. As the company grows, new shareholders are often required to join the agreement when they acquire shares.
Can it be changed later?
- Yes, but usually only with the consent of the parties to the agreement.
Need to know more? These may help:
- What is a company constitution, and does my startup need one?
- What is the difference between a director and a shareholder in New Zealand?
Or message us here and one of our experts will contact you within 48 hours.
Special thanks to Partner Peter Fernando and Associate Tom Mohammed for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
