Shareholders Agreement Jargon

Shareholders agreements can be complex and the jargon can be confusing. Here are some examples and explanations to help you navigate them:
 

Share Vesting 


Share vesting is a process that allows a founder or employee to ‘earn’ their shares or stock options over time (this is common in startups), or based on hitting certain milestones (this is less common).
 

Buy-back 


A right for the company to buy back shares, otherwise known as a call option. For example when an employee-shareholder leaves, the company can have the right to (but doesn’t have to) buy back their shares.
 

Put option 


A put option is a right to make another party buy your shares on pre-agreed terms.
 

Good leaver / bad leaver 


Good leavers are generally employee-shareholders who involuntarily leave due to death, incapacity, redundancy or after a specified period of service. Bad leavers are generally those that voluntarily leave before a specified time, are dismissed or (the catch-all) are not good leavers. Bad leavers typically get way less than market value for their shares if they leave. These types of clauses are typically heavily negotiated, especially when an investor is involved.


Drag along 


A right allowing a majority shareholder to force the remaining shareholders to accept an offer to buy the whole company, on the same terms. In other words, the leftover shareholders are "dragged along" into the deal.
 

Tag along 


On the flipside, a tag along is a rule allowing minority shareholders to join in a sale by the majority shareholders i.e. they get to "tag along" with the sale by forcing a purchaser to buy their shares too, on the same terms.
 

Covenants 


Covenants are promises to do or provide something or to refrain from doing or providing something. You’ll often see restrictive covenants in shareholders agreements like non-compete clauses or clauses that prevent someone from poaching clients or team members when they leave.
 

Pre-emption rights 


Pre-emption rights give existing shareholders a first right of refusal to take up new shares issued by the company. This means a company cannot offer shares to new investors without first offering them to the existing shareholders (on a pro rata basis) on the same terms.

Not all shareholder agreements will contain these rules, nor will they always be required. Whether any or all of these rules are relevant to you will depend on your circumstances and what you agree with your fellow shareholders and investors.

-----

Need help with your Shareholders Agreement?

Submit your enquiry to Lexoo and get free fixed-fee quotes from expert Shareholders Agreement Solicitors today.
business_icons_tnp

2. Compare profiles and quotes

Get 3 handpicked quotes from
our legally trained team

3. Choose your lawyer

A free no obligation discussion
with our lawyers

An entrepreneur's guide to working with lawyers.
Get insider tips in our free ebook.
Download it now.