Any company holding a shareholder needs a shareholder pact. Even if your business is private (no shares sold to the public) and is closely linked to a small number of shareholders, it is important to have an agreement. Small private companies often use these agreements more than large state-owned enterprises. For example, when an investor buys preferred shares in a company for $20 each, converted one by one into common shares, and the company then proceeds with a new set of capital increases that values the common shares at $15 each (a decrease), the investor`s shares will be depreciated (economic dilution). The investor could not convert his preferred shares into common shares without losing $5 per share. An anti-dilution economic provision would protect that investor by stating that if the company issues shares at a lower price than the previous round in which that preferred shareholder invested, it can obtain more common shares if it converts to make a total value. Shareholder agreements are governed by state laws, but federal laws – particularly the securities and exchange commission (SEC) rules – are concerned because the shares are securities, especially shares, which are available to the public. For shareholders, their rights and obligations are described and how shares can be distributed or sold. The company describes how the business is operated and how important decisions are made. The shareholders` pact will have a direct influence on how decisions are made within a company, and that is why it is so important. While there is a board of directors and a management team, everyone must work according to the guidelines of the shareholder contract. A change to the agreement can only take place if all shareholders accept the changes, making it even more important to define the parameters of how the transaction should be managed correctly the first time. As with all shareholder agreements, an agreement for a startup often includes the following sections: In a small company where a person can hold more than 50% of the shares, a majority shareholder may be prevented from choosing any director, simply because of his majority ownership.

Depending on your jurisdiction, you may have some options to determine the directors of the company. For example, shareholders could each appoint a director. This option works best if there are a smaller number of shareholders and you want each shareholder to have the same power. Mediation is a process in which a neutral third party, the Mediator, assists the parties to the conflict in negotiating an agreement on the issue of conflict. Arbitration is a procedure by which the parties to the dispute submit their dispute to an agreed neutral third party who, after hearing from both parties, will decide the resolution of the problem. When a shareholder converts his preferred shares into common shares, the conversion price of his preferred shares is reduced by the effect of the complete anti-dilution of the ratchet to reflect the issue price of the new cycle. This means that a preferred shareholder can convert his preferred shares at a lower price. When the shareholder holds common shares, additional shares are often issued after the new cycle to make a whole.