If you’re building a startup or small business with a co-founder (or planning to bring in investors), you’ll eventually run into a big question: what is a shareholders agreement, and do you actually need one?
In plain terms, a Shareholders Agreement is a written set of rules for how a company is owned and run. It’s not just “paperwork” - it’s often the difference between a smooth partnership and a messy dispute when something changes (and in business, things always change).
Even when everything is going well, a Shareholders Agreement can help you make faster decisions, set expectations, and protect the value you’re building. And if things don’t go well, it can be the document that helps you avoid a deadlock, limit damage, and exit cleanly.
Below, we’ll walk you through what a Shareholders Agreement is, what it typically covers in Australia, when you should put one in place, and common mistakes we see startups make when they skip it.
What Is A Shareholders Agreement (And What Does It Actually Do)?
So, what is a shareholders agreement in practice?
A Shareholders Agreement is a private contract between the shareholders of a company (and usually the company itself) that sets out how the company will be owned, managed, funded, and what happens if someone wants to leave (or has to leave).
It’s designed to deal with the real-life situations that come up after you incorporate:
- Who gets to make which decisions?
- What happens if a shareholder stops contributing?
- How do you bring in a new investor?
- Can someone sell their shares to a stranger?
- What if founders fall out, or one wants to exit early?
In Australia, a Shareholders Agreement sits alongside your company’s constitution and the rules in the Corporations Act. Your constitution sets the company’s internal governance rules (and can be accessed through ASIC in certain circumstances), while a Shareholders Agreement is usually more detailed and tailored to your commercial reality.
If your business has more than one shareholder, putting a clear Shareholders Agreement in place early can save you time, cost, and stress later.
Why Not Just “Rely On Trust”?
Most co-founders start with a high level of trust - and that’s great. But trust doesn’t replace clarity.
A good Shareholders Agreement doesn’t assume you’ll fight. It assumes you’ll grow. And growth usually brings new pressures: bigger revenue, bigger risk, outside investors, new hires, and competing priorities. The agreement gives you a framework to handle those changes without scrambling.
Shareholders Agreement vs Company Constitution: What’s The Difference?
It’s common to ask whether you need both a Shareholders Agreement and a constitution.
While they can overlap, they’re not the same thing.
Company Constitution (Broad Rules)
A constitution is a governing document for the company. It typically covers high-level mechanics like issuing shares, director powers, meetings, and basic procedures.
Many startups adopt a constitution early, particularly if they want rules that differ from (or add to) the “replaceable rules” under the Corporations Act. You can also tailor it to suit your business model and growth plans via a Company Constitution.
Shareholders Agreement (Practical Commercial Rules)
A Shareholders Agreement is usually more commercially focused. It often deals with:
- how decisions are made between founders and investors
- what happens if someone exits or underperforms
- how shares can be transferred
- how funding and dilution works
- confidentiality and restraints
It’s also typically private, which is useful when you want sensitive commercial terms kept out of public view.
Do They Need To Match?
Yes - your constitution and Shareholders Agreement should be consistent (or at least clearly explain which one prevails if there’s a conflict). Misalignment between documents can create uncertainty and disputes right when you can least afford them.
When Should Your Startup Put A Shareholders Agreement In Place?
Many founders wait until “later” - usually because they’re focused on product, customers, and runway. But in our experience, later often turns into too late (or at least more expensive and harder).
Some practical times to put a Shareholders Agreement in place include:
- When you incorporate with a co-founder (even if you’re close friends or family)
- Before taking investment (including friends/family money)
- Before issuing shares to advisors or employees
- Before a major pivot or scale-up (new markets, new revenue model, major hire)
- When you’ve had your first “hard conversation” about equity, effort, or control
If you’re still at the idea stage and haven’t incorporated yet, you might start with a Founders Agreement to align expectations before formal shareholding is even in play. Once a company exists and shares are issued, a Shareholders Agreement is often the next step.
A Quick Reality Check: Things Change
Even if everyone starts at 50/50 and contributes equally, life happens. One founder may want to travel, start a family, work on something else, or take a full-time job. Investors may want stronger reporting rights. You may want to hire a CEO. You may want to sell.
A Shareholders Agreement is your chance to define the rules before emotions and urgency take over.
What Should A Shareholders Agreement Include In Australia?
There’s no single “one-size-fits-all” Shareholders Agreement, because the right terms depend on how your business operates, how many shareholders there are, and whether you expect investment.
That said, there are several clauses we commonly see as essential for Australian startups and small businesses - but they should be tailored to your structure and drafted carefully to work with your constitution and the Corporations Act.
1. Ownership, Roles And Responsibilities
This section usually sets the foundation:
- who owns what percentage (and which classes of shares, if any)
- who will be directors, and who will be involved day-to-day
- whether shareholders are expected to work in the business
It’s also a good place to align how you see the difference between owning shares and running the company (which is not always the same thing). If you’re unsure of the distinction, it can help to get clear on the director vs shareholder roles early.
2. Decision-Making And Reserved Matters
One of the biggest benefits of a Shareholders Agreement is avoiding confusion about who can decide what.
Typically, you’ll see:
- Board decisions (directors manage day-to-day operations)
- Shareholder decisions (big structural decisions)
- Reserved matters requiring unanimous or special approval
Reserved matters might include issuing new shares, taking on major debt, buying or selling major assets, changing the business model, or appointing/removing directors.
3. Funding, Capital Calls And Dilution
Startups often need more cash than expected. A Shareholders Agreement can set out (in a way that fits your company’s structure and is properly documented):
- whether shareholders must contribute more money if needed (capital calls)
- what happens if someone can’t (or won’t) contribute
- how new investment affects ownership percentages (dilution)
Without rules here, the company can end up stuck - one founder wants to inject cash, another can’t, and you have no agreed process to move forward.
4. Share Transfers: Selling, Exiting And Bringing In New People
One of the most practical parts of a Shareholders Agreement is controlling who can become an owner of your company.
This usually includes concepts like:
- right of first refusal (existing shareholders get first option to buy shares before a third party)
- valuation mechanisms (how the price is set)
- limits on transfers (so shares can’t be sold freely without consent)
And if you ever need to formalise a transfer, it helps to understand the process for transferring shares correctly (including proper documentation and company records).
5. Founder Departures, Bad Leavers And Good Leavers
Founders leaving early is one of the most common startup pain points.
A Shareholders Agreement can include “good leaver / bad leaver” clauses. These clauses aim to deal with situations like:
- a founder resigns voluntarily
- a founder is terminated for misconduct
- a founder stops contributing meaningfully
- a founder becomes unable to work due to illness or other circumstances
The consequences often tie into whether (and at what price) the founder must sell their shares back to the company or other shareholders. Because these clauses can have serious financial and control implications, they should be drafted carefully so they reflect what you actually intend and work with your company documents and legal obligations.
6. Deadlocks And Dispute Resolution
Deadlocks happen when shareholders (often two founders at 50/50) can’t agree on a major decision.
A Shareholders Agreement can include a process to break deadlocks, such as:
- escalation to a third-party mediator
- referral to an independent expert for a binding decision
- buy-sell mechanisms (where one party offers to buy the other out)
The right approach depends on your business and risk tolerance - and these mechanisms need careful drafting to work as intended - but the key is having some plan before you’re in the middle of a conflict.
7. Confidentiality, Intellectual Property And Restraints
If your company has valuable IP (software code, brand assets, customer lists, product designs), you’ll want to make sure it stays protected.
Shareholders Agreements often include:
- confidentiality obligations
- rules about who owns intellectual property created by founders
- limited restraints (for example, preventing someone from competing using your confidential information)
These provisions work best when they’re consistent with your other core documents and your day-to-day operations.
Common Mistakes Startups Make With Shareholders Agreements
By the time founders seek help, it’s often because something has already gone wrong (or an investor has asked for documents and due diligence has begun). Here are a few common issues we see.
Leaving It Too Late
It’s much easier to agree on fair rules when you’re aligned and optimistic. Once there’s a dispute (or a looming deal), everyone’s negotiating from a defensive position.
Assuming Equal Shares Means Equal Control
50/50 ownership can feel fair, but it can also create a perfect deadlock if you don’t build in a way to break ties.
If you’re considering 50/50, make sure you have a realistic deadlock plan.
Using A Template That Doesn’t Match Your Structure
Templates often miss the details that matter most: vesting, founder exits, dilution, reserved matters, and investor rights.
Worse, some templates create inconsistencies with your constitution or fail to deal with Australian legal requirements and common market expectations.
Not Keeping Company Records Clean
Even the best agreement won’t help if your share records don’t match reality. If you’ve issued shares, transferred shares, or promised equity informally, you need clean documentation.
For example, keeping basic records like share certificates and a clear register of members can reduce confusion and make investment or sale processes smoother.
Forgetting About Employment And Contractor Arrangements
Many founders wear two hats: shareholder and worker. That’s normal. But your Shareholders Agreement shouldn’t be your only “relationship” document.
If someone is working in the business (as an employee or contractor), you’ll usually also want:
- a clear employment or contractor agreement (to cover duties, pay, IP assignment, leave, and termination)
- workplace policies where relevant (especially once you start hiring)
If you’re hiring early, having the right Employment Contract in place can prevent issues that a Shareholders Agreement isn’t designed to handle.
Key Takeaways
- A Shareholders Agreement is a private contract that sets the rules for ownership, decision-making, exits, and investment in your company.
- If you have co-founders or investors, it’s often one of the most important legal documents you can put in place early.
- A Shareholders Agreement is different from a constitution: constitutions are broader company rules, while Shareholders Agreements are more detailed and commercially focused.
- Strong Shareholders Agreements typically cover decision-making, reserved matters, funding, share transfers, founder exits, deadlocks, and confidentiality/IP protections.
- Common startup mistakes include relying on templates, delaying the agreement until a dispute arises, and failing to align documents and company records.
This article is general information only and does not constitute legal advice. If you’d like advice for your specific circumstances, you should speak to a lawyer.
If you’d like help putting a Shareholders Agreement in place (or updating one as you bring on investors), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
