Those Pesky Common Shareholders

Rick Segal posted a great piece, A Fatal Paper Cut , laying out the importance of incorporating the key voting elements into your early and initial share grants and purchases. When new money comes in, it will usually ask that most, if not all, of the existing investors have signed off and agreed to the terms of the new money. They do not want to take a minority shareholder suit at some future date. Unfortunately, many entrepreneurs begin issuing stock early and often in lieu of cash (programmers, attorneys, etc) as well as to angel investors. It is critical that you also include a Voting Agreement with these shares that layout specifically how future approvals will occur.  In the cleanest situation, you can state that if the majority of a share class (e.g. common in this case) agree with a certain action (financing, merger, etc), that the entire class is "dragged along". You can set up more refined versions of this whereby this applies to investors owning less than x% (say 10%). In any case, you do not want to end up in a situation where you are trying to chase down signatures for a much needed financing and you either a) can’t find the shareholders or b) they are holding out.

One thought on “Those Pesky Common Shareholders

  1. While very true as to note the importance of such voting agreements, the difficulty lies in reaching out to and educating entrepreneurs of the likely steps they need to take before launching a venture using angel funds. Its good to remember that beggars can’t be choosers and many inexperienced entrepreneurs do not have the upper hand when raising their first series of money.

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