Sign It Before You Need It: Why the Shareholders Agreement Belongs on Day One

Registering a Pty Ltd takes less than a day. Deciding what happens when a co-founder wants out takes considerably longer — which is precisely why so many founders avoid the question until it is forced upon them.

Registration creates a legal entity. It does not create a working relationship. The replaceable rules in the Corporations Act, or a bare constitution, set the minimum mechanics of a company. They say almost nothing about vesting, exits, or what happens when two people who founded a business together stop agreeing on anything.

What a Good Agreement Actually Locks In

A shareholders agreement is not legal decoration. Done properly, it answers the questions nobody wants to ask while everyone still likes each other:

• Exit rights. Who can sell, to whom, and at what price? A pre-emptive rights regime ensures a departing shareholder offers shares to existing holders before strangers.
• Vesting and reverse vesting. Founders' shares are typically subject to a vesting schedule, so someone who leaves after eight months doesn't walk away with a quarter of the company.
• Drag-along and tag-along. If a majority accepts an acquisition offer, minority holders can be dragged into the sale — and, conversely, can tag onto the same terms rather than being left behind.
• Deadlock clauses. For 50/50 companies especially, a mechanism for breaking a stalemate — mediation, a buy-sell provision, or a casting structure — prevents the company from becoming a hostage situation.
• Decision-making thresholds. Which matters require unanimity, which need a simple majority, and who signs what.

The Australian Pitfalls We See Repeatedly

The most common failure is the handshake. Founders agree verbally that 'it'll all be even' and never reduce it to writing. Under Australian law, that ambiguity is resolved by the default rules — which rarely match anyone's actual intention.

The second is the borrowed template. An agreement lifted from another jurisdiction, or from a company with a completely different cap table, is worse than none: it creates the illusion of protection while containing clauses nobody has read.

The third is ignoring the constitution. The shareholders agreement and the constitution must be consistent; a clause in one that contradicts the other invites a dispute about which governs.

Why Waiting for the Term Sheet Is Too Late

The standard argument for delay is that investors will want to renegotiate everything anyway. This gets the sequencing backwards. A term sheet typically arrives when leverage is already asymmetric — one founder is negotiating from a position of momentum, another from anxiety. Vesting, valuation credits for early work, and IP ownership are all settled far more fairly when no one is staring at a deadline.

Investors, far from objecting to an existing agreement, generally regard one as evidence of a functional founding team. What they expect to change are the investor-facing terms — not the founder exit mechanics, which they will assume are already sound.

The Cost of the Alternative

Founder disputes are among the most common causes of early-stage company failure in Australia, and litigation between former partners is ruinously expensive relative to the sums usually in dispute. A well-drafted shareholders agreement is a fraction of a single month of legal fees in a contested breakup.

Our view is straightforward: if a company is worth registering, the relationship underpinning it is worth documenting. Put the agreement on the same to-do list as the ABN and the bank account — and sign it while the only thing on the table is optimism.