Shareholders' Agreement Clauses Every Founder Should Understand Before a Funding Round

A term sheet arrives, and somewhere in the following weeks a Shareholders' Agreement shows up alongside it, usually drafted first by the investor's counsel. By that point it's too late to be reading about drag-along rights for the first time. This is the clause-by-clause layer on top of what an SHA is and how it differs from your Founders' Agreement, which we've already covered in full.

Where an SHA fits versus your Founders' Agreement

In short: a Founders' Agreement covers only the founders, usually signed early, before there's anything to fight over. An SHA covers every shareholder, including investors, and typically shows up at your first priced funding round. The full comparison, including where each one is filed and what binds the company, is in Founders' Agreement vs SHA vs LLP Agreement. What follows here is the clause content specific to an SHA that the comparison article doesn't get into.

Drag-along: the exit-forcing clause

A drag-along right lets a majority or investor shareholder who has agreed to sell compel the minority shareholders, typically the founders, to sell on the same terms. It's a standard investor-side protection, and its purpose is to enable a clean 100% exit rather than leaving an acquirer to negotiate separately with holdouts who could block the deal.

Tag-along: the exit-protecting clause

Tag-along is the mirror right. If the majority shareholder sells, minority shareholders can require the buyer to purchase their shares too, on the same terms. It exists to stop minority holders being left behind, holding shares in a company under new, unknown ownership, with no exit of their own.

Liquidation preference: participating vs non-participating

On a liquidation event, a sale, wind-down, or similar exit, investors holding preference shares get paid out ahead of ordinary equity holders, meaning the founders. That's the liquidation preference. The version that matters most is whether it's participating or non-participating.