The Shareholder Agreement Nobody Reads (And Why It's the Only Document That Actually Matters)
Go dig up the shareholder agreement you signed when you first started the company. I'll wait. I bet at least one of these is in there.
Most founders sign their shareholder agreement the same way they accept software terms of service — quickly, without reading, and with a vague sense that it probably won't matter. For 98% of companies it doesn't. But you're reading this because you think you might be in the other 2%.
The reasoning is really simple: you're so busy building something that this agreement is a problem to solve another day. Or you love working with your co-founders and you're going to be best friends forever. Or both you and your co-founders are broke and you'll hit the finish line together. Or some combination of all of that or something totally different. But the reality is that the shareholder agreement is something you can not worry about right now, so you sign it. Your personal attorney doesn't review it. Or you don't have your own attorney.
The reality of startups is bleak: the number of startups that go public or get acquired is in the single digits. Of the seed-funded companies that raised between 2011 and 2018, only 7% made any exit at all — and acquisitions outnumbered IPOs by 10 to 1. The number that exit for money that actually matters is even smaller. When you start your company, both you and your co-founders are just dreaming of the time when you can buy something more than ramen for supper, so sign the fucking thing and let's get on with it.
Here's the inversion nobody tells you: the shareholder agreement feels like a 1% problem at signing because success feels like a 1% probability. But conditional on actually winning — conditional on being in that rare group where the company actually matters — the shareholder agreement governs 100% of your outcome. It's not a document that matters 1% of the time. It's a document you have a 1% chance of needing, and a 100% chance of being completely at its mercy if you do. The person on the other side of that agreement almost certainly read theirs.
I've signed several shareholder agreements and never once had my own attorney look at any of them. I'm in the same boat as most of you. This post is not legal advice. None of the examples or suggested language should be construed as legal advice. I'm not an attorney. I didn't have my attorney look at this post. Don't copy and paste this into your next agreement. Hire a real attorney barred in your state who doesn't work for your company. Period.
So let's talk about what's already in that document that you didn't know to look for.
These aren't exotic clauses. They're not predatory investor tricks. They're standard boilerplate that gets inserted because nobody pushed back, nobody read it carefully, and the lawyer who drafted it was working for the company — not for you.
Here's what to look for. And more importantly, here's what to fight like hell to get out.
PART ONE: What Should NOT Be In Your Agreement
1. Drag-Along With No Price Floor
A drag-along clause is completely standard and reasonable. It allows majority shareholders to force minority holders to sell in an acquisition so that a single holdout can't torpedo a deal. You should expect to see it. What you should not accept is a drag-along with no minimum price threshold.
Without a floor, the majority can drag you into a sale at literally any price — including a distressed sale that wipes out your equity while the controlling shareholder negotiates a separate retention package, consulting agreement, or earnout with the buyer. Your shares get sold for a dollar. Their package is worth millions. This isn't hypothetical.
What bad looks like:
"Each Shareholder agrees to vote in favor of, and take all actions necessary to effect, any transaction approved by holders of a majority of the outstanding shares, including any merger, acquisition, or sale of substantially all assets, regardless of the consideration received."
That "regardless of consideration" language is the trapdoor. It means any price, any terms, any structure.
What better looks like:
"The drag-along right may only be exercised in connection with a transaction in which the per-share consideration is no less than [X times] the price paid per share in the most recent financing round, or, if no financing has occurred, no less than [Y] times the Company's trailing twelve-month revenue as determined by the Board with the written consent of holders of at least [Z]% of the minority shares."
The specific numbers are negotiable. The principle — a floor exists — is not.
2. "Bad Leaver" Definitions That Are Deliberately Broad
Almost every shareholder agreement distinguishes between good leavers and bad leavers. Good leavers — people who leave for legitimate reasons like illness, death, or mutual agreement — typically get to keep their vested shares. Bad leavers typically forfeit unvested shares, and sometimes have their vested shares repurchased at a punitive price.
The problem is the bad leaver definition. When it's written tightly, it's fair. When it includes vague language like "behavior detrimental to the company" or "failure to perform duties to the board's satisfaction," it's a trapdoor that the controlling shareholder gets to trigger at will. If you become inconvenient, the board decides you're a bad leaver. You lose your shares. There's no appeal.
What bad looks like:
"A Shareholder shall be deemed a Bad Leaver if, in the reasonable determination of the Board, such Shareholder has engaged in conduct materially detrimental to the Company's interests, reputation, or operations, or has failed to perform their duties and responsibilities to the Board's satisfaction."
"Reasonable determination of the Board" is not a legal standard. It's a permission slip.
What better looks like:
"A Shareholder shall be deemed a Bad Leaver only upon the occurrence of one or more of the following specifically enumerated events: (i) conviction of a felony or crime involving moral turpitude; (ii) a final, non-appealable finding of material breach of fiduciary duty; (iii) gross negligence causing documented, material financial harm to the Company; or (iv) voluntary resignation within twelve (12) months of the Agreement's execution without Good Reason as defined in Section [X]. The occurrence of a Bad Leaver event shall be determined by a unanimous vote of all Board members excluding any member affiliated with the departing Shareholder."
Specific. Enumerated. Not subject to interpretation.
3. Supermajority Requirements That Cage the Minority
Requiring enhanced voting thresholds for major decisions is legitimate governance. Investors and minority shareholders reasonably want protection against a majority making unilateral decisions that harm them. The abuse happens when those same supermajority thresholds are applied asymmetrically — protecting the majority's interests but blocking the minority's ability to exercise their own rights.
A 90% threshold to approve a new share issuance that would dilute everyone: reasonable minority protection. A 90% threshold to call a special meeting to review related-party transactions: that's a cage. If the same percentage required to approve a major acquisition is required to simply request an audit of management compensation, something is wrong.
What bad looks like:
"The following actions shall require the affirmative vote of holders of not less than ninety percent (90%) of all outstanding shares: (a) any amendment to this Agreement; (b) any merger, acquisition, or change of control; (c) any issuance of new shares; (d) any special meeting called by shareholders; (e) removal of any director; (f) any related-party transaction review."
Items (d), (e), and (f) in that list are minority protection mechanisms being locked behind a supermajority the minority can never reach.
What better looks like:
"Actions requiring a [90%] supermajority are limited to: (a) any merger, acquisition, or change of control; (b) any issuance of shares that would dilute existing shareholders by more than [X]%; (c) any amendment to the core governance provisions of this Agreement. Actions related to shareholder rights, including calling special meetings, requesting audits of related-party transactions, or exercising tag-along rights, shall require only a simple majority of the shares held by non-affiliated shareholders."
The principle: supermajority to protect the company, simple majority to protect the shareholders.
4. Unilateral Valuation Mechanisms for Share Repurchases
Any provision that allows the company to repurchase your shares — whether triggered by departure, death, or default — needs to specify how those shares will be valued. The valuation mechanism is where the abuse lives.
Book value in a SaaS company is essentially nothing — it reflects assets on the balance sheet, not the value of recurring revenue, customer relationships, or intellectual property. EBITDA multiples applied by a board that controls the EBITDA number are a weapon. A formula that produces a price of a few thousand dollars on shares that are worth millions under the right acquisition scenario is not a valuation. It's confiscation with paperwork.
What bad looks like:
"In the event of any repurchase of Shares pursuant to this Agreement, the purchase price per share shall be determined by the Board in its reasonable discretion based on the book value of the Company's assets as of the most recent fiscal quarter end."
Book value. Board discretion. Two phrases that should never appear in the same sentence as "share repurchase price."
What better looks like:
"The repurchase price per share shall be the Fair Market Value as determined by a mutually agreed independent third-party valuation firm using a revenue multiple methodology consistent with comparable SaaS transactions in the twelve months preceding the repurchase event. If the parties cannot agree on a valuation firm within thirty (30) days, each party shall select one firm, and those two firms shall jointly select a third firm whose determination shall be binding. The cost of the valuation shall be borne equally by the Company and the departing Shareholder."
Independent. Third-party. Revenue multiple. Those three things protect you.
5. Non-Competes With No Carve-Outs, No Geography, No Time Limit
Non-compete provisions are standard and you should expect them. What is not standard — and what should not be in the agreement — is a non-compete that is unlimited in scope, unlimited in geography, unlimited in duration, and contains no carve-outs for expertise you brought into the company before you signed.
If you spent ten years building telephony software before co-founding a company that includes telephony as one of several features, "any software that includes telephony functionality" should not be in your non-compete scope. You owned that domain before the company existed. Get the carve-outs in writing at signing, because they cannot be added later.
What bad looks like:
"During the term of this Agreement and for a period of five (5) years following the termination of Shareholder's relationship with the Company for any reason, Shareholder shall not, directly or indirectly, engage in, own, manage, operate, control, be employed by, or participate in any business that competes with or is similar to the business of the Company in any geographic area in which the Company operates or has operated."
"Similar to the business of the Company" is vague enough to mean almost anything. "Any geographic area in which the Company operates" in a SaaS company with national clients is effectively unlimited. Five years is a career.
What better looks like:
"Shareholder agrees not to directly compete with the Company's core product — defined as [specific product category] serving [specific customer segment] — for a period of [24] months following departure, within the United States. This restriction expressly excludes: (i) any domain, technology, or customer category in which Shareholder had demonstrable experience prior to the date of this Agreement, as enumerated in Schedule A attached hereto; (ii) any activity that does not directly compete with the Company's then-current revenue-generating products; and (iii) passive investment of less than [5]% in any publicly traded company."
The carve-outs in Schedule A — negotiated and signed at founding — are what protect your future.
6. Forced Transfer of Vested Shares on Employment Termination
This is one of the most commonly abused provisions in founder agreements and almost nobody catches it until it's too late. The clause sounds like standard vesting protection — if a founder leaves early, the company can repurchase their unvested shares. Completely reasonable.
The abuse happens when the clause extends to vested shares. Vested shares are earned shares. You worked for them under the agreed schedule. A provision that allows the company to repurchase vested equity — especially at a formula price well below market value — when you are terminated (including without cause) is not founder protection. It is a mechanism to strip your equity the moment you become inconvenient or the company is approaching a valuable exit.
What bad looks like:
"Upon termination of a Founder's employment or service relationship with the Company for any reason, the Company shall have the right, exercisable within ninety (90) days of such termination, to repurchase all shares held by such Founder at a price per share equal to the lower of: (i) the original issue price; or (ii) the book value per share as of the termination date."
"All shares" and "for any reason" are the words that matter. This clause applies to shares you fully earned.
What better looks like:
"Upon termination of a Founder's service relationship, the Company shall have the right to repurchase only unvested shares at the original issue price. Vested shares shall not be subject to any repurchase right except in the case of a Bad Leaver event as defined in Section [X]. In no event shall any repurchase right apply to shares that have been held for more than [four (4)] years from the date of issuance, regardless of vesting status."
Vested shares are yours. Full stop.
7. Shareholder Death With No Defined Transfer Process
This one gets skipped in almost every early-stage agreement because nobody wants to talk about it. But if a founder dies with no defined process for how their shares transfer, you now have a co-founder relationship with whoever inherits the estate — a spouse, an adult child, a trustee, or a probate court — none of whom you chose, none of whom understand the business, and all of whom have full shareholder rights including voting, information access, and blocking actions requiring minority consent.
What bad looks like: The absence of any provision at all. More common than you'd think.
Or:
"In the event of a Shareholder's death, such Shareholder's shares shall pass in accordance with the terms of such Shareholder's estate or trust documents without restriction."
No restriction means the estate inherits full shareholder rights with no obligation to cooperate, sell, or engage constructively.
What better looks like:
"Upon the death of a Shareholder, the Company shall have a right of first refusal, exercisable within one hundred eighty (180) days of death, to purchase all shares held by the deceased Shareholder at Fair Market Value as determined pursuant to Section [X]. If the Company does not exercise this right within the specified period, the remaining Shareholders shall have a secondary right of first refusal, exercisable within an additional ninety (90) days, to purchase the shares on a pro-rata basis at the same price. Shares not purchased through either right shall transfer to the deceased's estate, provided that any transferee shall be bound by the terms of this Agreement as a condition of transfer and shall have no greater rights than those held by the deceased Shareholder."
The estate can inherit economic value. It should not automatically inherit governance rights.
8. Shareholder Divorce With No Defined Treatment of Marital Property
Less commonly addressed than death, and equally ignored until it becomes a crisis. In most states, shares held by a founder during a marriage are marital property subject to division in divorce proceedings. Without a specific provision addressing this, a divorce can result in a co-founder's ex-spouse becoming a shareholder — with all associated rights — without any other shareholder having agreed to it or having any recourse.
What bad looks like: Again, usually the complete absence of any provision.
What better looks like:
"No Shareholder shall transfer shares to a spouse, domestic partner, or former spouse pursuant to any divorce decree, property settlement agreement, or domestic relations order without the prior written consent of the holders of [X]% of the remaining shares, which consent shall not be unreasonably withheld. In the event of any such transfer, the transferee shall have only economic rights with respect to such shares and shall have no voting rights, no right to attend shareholder meetings, and no right to receive Company information beyond standard financial reporting. The non-transferring Shareholders shall retain a right of first refusal to purchase any shares subject to a marital property transfer at Fair Market Value within ninety (90) days of notice."
Economic rights transfer in a divorce if required. Control rights do not.
9. Arbitration Clauses That Let One Party Select the Arbitrator
Mandatory arbitration is standard and generally acceptable — it's faster and cheaper than litigation and keeps disputes private. The abuse is in who selects the arbitrator and under what rules. An arbitration clause that gives the company the right to select the arbitrator, or that specifies rules administered by an organization with a history of favoring corporate clients, is not neutral dispute resolution. It's home field advantage baked into the contract.
What bad looks like:
"Any dispute arising under this Agreement shall be resolved by binding arbitration administered by [Company-selected firm] under rules selected by the Company, with a single arbitrator appointed by the Company, in the jurisdiction of the Company's principal place of business."
Single arbitrator. Appointed by the company. Under rules the company selects. In the company's city.
What better looks like:
"Any dispute arising under this Agreement shall be resolved by binding arbitration administered by JAMS or the American Arbitration Association under their then-current commercial arbitration rules. The arbitrator shall be selected by mutual agreement of the parties within thirty (30) days of the dispute notice; if the parties cannot agree, the arbitration organization shall appoint an arbitrator from its panel according to its standard procedures. Each party shall bear its own costs unless the arbitrator finds the losing party's position to have been frivolous, in which case costs may be assessed against the losing party."
Neutral body. Mutual selection process. Standard rules.
10. Amendment Provisions Requiring Only Majority Consent
Every protection you negotiated can be erased if the agreement can be amended by a simple majority vote. The controlling shareholder holds the majority. You hold the minority. A contract that one party can unilaterally rewrite is not a contract — it's a suggestion with a signature on it.
What bad looks like:
"This Agreement may be amended at any time by written consent of the holders of a majority of the outstanding shares."
If you hold 26% and the majority holds the rest, your signature on the original agreement means nothing.
What better looks like:
"This Agreement may not be amended without the written consent of: (i) holders of not less than [75]% of all outstanding shares; and (ii) the holders of not less than [66]% of the minority shares (defined as all shares not held by the founding majority shareholder or their affiliates). Notwithstanding the foregoing, any amendment that disproportionately and adversely affects any individual Shareholder's rights shall require the written consent of such Shareholder."
The last sentence is the one that matters. If an amendment specifically hurts you, you get a veto on it.
11. Family Transfer Rights With No Governance Strings Attached
Almost every shareholder agreement allows shares to be transferred freely to family members or family-controlled entities — spouses, children, trusts. This is reasonable from an estate planning perspective. What's almost never included is any restriction on the governance rights those transferred shares carry.
A controlling shareholder can transfer shares to a spouse, three adult children, and a family trust — all of whom then vote as a coordinated bloc with zero accountability to the other shareholders and zero obligation to engage in good faith. The founder relationship you thought you were in quietly becomes a family business where the other family outvotes you on everything that matters.
What bad looks like:
"Notwithstanding any other transfer restriction in this Agreement, any Shareholder may freely transfer shares to: (i) a spouse or domestic partner; (ii) lineal descendants; (iii) trusts for the benefit of any of the foregoing; or (iv) entities wholly owned by the foregoing, without triggering any right of first refusal or other transfer restriction."
Free transfer. No governance conditions. No restrictions on the transferred shares.
What better looks like:
"Permitted transfers to family members or family-controlled entities shall be subject to the following conditions: (i) the transferee must execute and deliver a joinder to this Agreement as a condition of transfer; (ii) transferred shares shall carry the same voting rights, restrictions, and obligations as the transferring Shareholder's shares immediately prior to transfer; (iii) for voting purposes, all shares held by a Shareholder and their Permitted Transferees shall be aggregated and treated as a single bloc, and no Permitted Transfer shall create additional board representation rights or veto rights not already held by the original Shareholder; and (iv) any Permitted Transfer shall not reduce the original Shareholder's obligations under this Agreement."
Transfer the economic interest. Don't manufacture new governance power in the process.
PART TWO: What SHOULD Be In Your Agreement
1. Tag-Along Rights With Matching Terms
If a majority shareholder sells their position, you get the right to sell yours at the same price, on the same terms, to the same buyer. Not a similar deal. The exact same deal. The tag-along is your protection against a controlling shareholder cashing out and leaving you holding illiquid shares in a company now controlled by someone you didn't choose.
What it should look like:
"In the event that any Shareholder (the 'Selling Shareholder') proposes to Transfer shares representing [20]% or more of the Company's outstanding shares to any third party, each other Shareholder shall have the right, exercisable within thirty (30) days of written notice, to participate in such Transfer on the same price, terms, and conditions as the Selling Shareholder, on a pro-rata basis. The Selling Shareholder shall use commercially reasonable efforts to include the participating Shareholders in the proposed Transfer on identical terms."
Same price. Same terms. Pro-rata participation. No exceptions.
2. Vesting Acceleration on Acquisition
Standard vesting schedules protect the company if a founder leaves early. They become punitive when a founder stays through an acquisition — works for four years, helps build something valuable, and then gets acquired the day before the final vest, forfeiting 25% of their equity to a new owner they never agreed to work for.
Double-trigger acceleration is the standard protection: if the company is acquired AND you are terminated without cause within a defined window, all remaining unvested shares immediately vest. Single-trigger acceleration — vesting on acquisition alone — is harder to negotiate but worth asking for.
What it should look like:
"In the event of a Change of Control, if a Shareholder's unvested shares are assumed or substituted by the acquirer and such Shareholder is terminated without Cause or resigns for Good Reason within twelve (12) months following such Change of Control, one hundred percent (100%) of such Shareholder's then-unvested shares shall immediately accelerate and vest ('Double-Trigger Acceleration'). 'Cause' and 'Good Reason' are defined in Schedule [X] and shall be interpreted narrowly in favor of the Shareholder."
Interpreted narrowly in favor of the shareholder. Four words that do significant work.
3. Pre-Emptive Rights on New Share Issuances
When the company issues new shares — in a funding round, to a new employee, or in any other transaction — you have the right to purchase your pro-rata share of those new shares before they are offered to anyone else, at the same price and on the same terms. Without this, dilution is a tool that can be applied selectively. Your percentage ownership gets engineered down without your input.
What it should look like:
"Each Shareholder holding not less than [5]% of the Company's outstanding shares shall have the right, but not the obligation, to purchase up to such Shareholder's pro-rata portion of any new shares issued by the Company, at the same price and on the same terms as offered to any other purchaser. The Company shall provide written notice of any proposed issuance not less than twenty (20) business days prior to the proposed issuance date. Failure to exercise this right within the notice period shall be deemed a waiver with respect to such issuance only."
Pro-rata. Same price. Same terms. Written notice with enough time to actually respond.
4. Board Representation Tied to Ownership Threshold, Not Relationships
Your right to board representation should be written into the agreement with a specific ownership threshold — not dependent on the goodwill of the controlling shareholder or a general reference to "reasonable board composition."
What it should look like:
"For so long as any Shareholder holds not less than [15]% of the Company's outstanding shares, such Shareholder shall have the right to appoint one (1) director to the Board of Directors, which director shall serve at such Shareholder's pleasure and may be removed and replaced only by such Shareholder. No other Shareholder or the Board shall have the right to remove a director appointed pursuant to this section without the consent of the appointing Shareholder."
Your seat. Your director. Removable only by you.
5. Defined Information Rights, Unconditional
You are a shareholder in a private company. There is no public market. There is no SEC filing. The only way you know what is happening with your investment is if the company tells you. Your information rights should not require you to ask nicely.
What it should look like:
"The Company shall deliver to each Shareholder holding not less than [5]% of the outstanding shares: (i) monthly management accounts within twenty (20) days of each month end; (ii) annual audited financial statements within ninety (90) days of fiscal year end; (iii) a copy of all Board meeting minutes within ten (10) business days of each meeting; (iv) written notice of any material transaction, litigation, or operational development within five (5) business days of the Company becoming aware of such development. These rights shall be unconditional and shall not be subject to Board approval, employment status, or any other condition."
Automatic. Periodic. Unconditional. Not subject to the mood of the board.
6. Minority Consent Rights on Related-Party Transactions
If the controlling shareholder is also the CEO, they have the ability to set their own compensation, approve transactions that benefit their family members, and enter into contracts with entities they own — all without minority shareholder input, unless the agreement specifically requires it.
What it should look like:
"Any transaction between the Company and any Shareholder, director, officer, or their respective affiliates involving consideration in excess of [$25,000] shall require the prior written approval of Shareholders holding not less than [66]% of the minority shares (as defined herein). The interested party shall be excluded from the vote. This right shall not be waived by any course of dealing or prior approval of similar transactions."
The interested party doesn't vote. The minority does.
7. Explicit Deadlock Resolution With Timeframes
Deadlocks happen. The agreement should have a defined process for resolving them that doesn't simply allow the party with more patience — or more cash — to outlast the other.
What it should look like:
"In the event of a Deadlock (defined as the failure to reach agreement on a matter requiring Shareholder approval within thirty (30) days of the matter being properly submitted for a vote), the parties shall: (i) first attempt resolution through good-faith negotiation between designated representatives for a period of thirty (30) days; (ii) if negotiation fails, submit the matter to non-binding mediation for a period of thirty (30) days; (iii) if mediation fails, any Shareholder may trigger the buy-sell mechanism in Section [X], under which any Shareholder may offer to purchase all other Shareholders' shares at a stated price, and each recipient of such offer may either sell at that price or purchase the offering Shareholder's shares at the same per-share price."
A process. With timeframes. That can't be indefinitely delayed.
8. Good Reason Definition That Includes Constructive Dismissal
If someone makes your role untenable — strips your responsibilities, creates a hostile environment, demotes you without cause — and you resign as a result, that should be treated as a Good Leaver event. Without an explicit definition of "Good Reason" that covers constructive dismissal, a controlling shareholder can effectively force you out while preserving the ability to call you a voluntary bad leaver.
What it should look like:
"'Good Reason' shall mean the occurrence of any of the following without the Shareholder's written consent: (i) a material reduction in the Shareholder's title, authority, duties, or responsibilities; (ii) a reduction in base compensation exceeding [15]% in any twelve-month period; (iii) relocation of the Shareholder's principal place of work by more than [50] miles; (iv) a material breach of any agreement between the Company and the Shareholder that is not cured within [30] days of written notice; or (v) any action or course of conduct by the Company or its controlling shareholders that would constitute constructive dismissal under applicable law. Resignation for Good Reason shall be treated in all respects as termination without Cause."
Constructive dismissal is covered. Explicitly.
9. QSBS Eligibility Maintenance Obligations
If you are building a company with the intention of qualifying for Section 1202 QSBS treatment on your gains, the agreement should include affirmative obligations on the company to take — and not take — actions that would affect QSBS eligibility. This includes maintaining C-corp status, staying below the $50M gross asset threshold at time of issuance, and not conducting prohibited business activities.
What it should look like:
"The Company shall use commercially reasonable efforts to maintain its status as a Qualified Small Business under Section 1202 of the Internal Revenue Code, including: (i) maintaining C-corporation status; (ii) ensuring that the aggregate gross assets of the Company do not exceed $50,000,000 at the time of any share issuance; (iii) refraining from engaging in any business activity that would disqualify the Company from Qualified Small Business status; and (iv) providing each Shareholder with written confirmation of the Company's QSBS status within thirty (30) days of any share issuance. The Company shall notify Shareholders promptly if any action is contemplated that could affect QSBS eligibility."
If QSBS matters to you — and at the numbers this blog is written for, it should — this clause belongs in the agreement.
10. Specific Non-Compete Carve-Out Schedule
As discussed in Part One, non-competes are standard. What is not standard — but should be — is a written schedule attached to the agreement that enumerates, specifically, the domains, technologies, customer categories, and prior work that are explicitly excluded from the non-compete scope. This schedule, signed at the time of the agreement, is the only protection that actually works.
What it should look like:
"Notwithstanding anything in Section [X] to the contrary, the following domains, technologies, and activities are expressly excluded from the non-compete obligations of [Shareholder Name] based on their demonstrable prior experience and are listed in Schedule A (Non-Compete Carve-Outs) attached hereto and incorporated by reference: [specific list of excluded domains as negotiated]. This Schedule may not be amended without the written consent of [Shareholder Name]."
The schedule is where the real work happens. It should be specific, comprehensive, and signed alongside the main agreement.
WHAT A BURNED FOUNDER WOULD HAVE INSISTED ON
I've spent eight years as a co-founder of a company that reached genuine scale — eight figures in ARR, bootstrapped, meaningful enterprise value on paper. I signed a shareholder agreement at the beginning without my own attorney. I trusted the relationship. I figured it would work itself out.
It didn't work itself out.
Without naming the company, the co-founder, or the specifics — because I'm still a substantial shareholder and an M&A process is ongoing — here's what I know now about what I should have demanded, and what I believe a genuinely ruthless strategic thinker would have insisted on before signing.
A deadlock mechanism with teeth. When two co-founders build a company together and disagree on fundamental strategic direction — growth vs. lifestyle, exit vs. hold, reinvestment vs. distribution — the absence of a deadlock resolution mechanism doesn't preserve the relationship. It preserves the status quo in favor of whoever holds more shares. A Russian Roulette or buy-sell mechanism, uncomfortable as it is to negotiate at founding, is the only fair resolution to a deadlock between parties with genuinely different visions.
Related-party transaction approval rights. When the majority shareholder is also the CEO, executive compensation, family member employment, and vendor selection are all potential related-party transactions. Without a specific provision requiring minority consent above a defined threshold, these decisions happen with no accountability. The minority shareholder finds out about them in board meetings or financial statements — if the information rights are strong enough to force disclosure at all.
A board seat that cannot be eliminated by structural changes. A board representation right tied to a ownership percentage threshold is meaningless if the board structure can be changed by majority vote. The right needs to be entrenched — either requiring the minority's consent to eliminate, or tied to a specific seat that cannot be restructured away.
Acceleration on involuntary role changes. If the company is sold and the new owner puts someone else in your role, you should be made whole on your unvested equity. A double-trigger acceleration provision that covers involuntary role changes — not just termination — is the protection that actually matches the real-world scenario.
A non-compete with specific, written, signed carve-outs for everything you might want to build next. This is the most expensive mistake to make. The non-compete that seems reasonable at signing becomes the cage that determines whether your next eight years are free or encumbered. Every domain you care about. Every technology you know. Every customer category you understand. Written down. Attached to the agreement. Signed. Before you need it.
The hardest part of this list is that every single item on it feels unnecessary when you sign. You're partners. You're aligned. You're going to build something great together. The agreement is just paperwork.
Until it isn't.
If you found one of these in your agreement, you're not alone. If you found three, call a lawyer before you need one. If you found five — welcome to the club. It's bigger than you think, and nobody talks about it.
This post is not legal advice. The sample language included is for illustrative purposes only and should not be copied, adapted, or used without review by a licensed attorney barred in your jurisdiction who represents you personally — not your company. Every agreement is different. Every state is different. Get your own lawyer.
The agreements I'm using for my current ventures are built around everything I just described. Next week I'll walk through exactly how I'm structuring ownership across multiple companies simultaneously — the QSBS implications, the LLC architecture, and why getting this right at founding matters more than almost any other decision you'll make.
— Redpoint Rack