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Your co-founder has stopped turning up and still owns a third of the company. Here is what a shareholder agreement changes, what goes in one, and what it costs.
A co-founder who walks away in month six keeps their full stake for ever unless something all of you signed says otherwise. Nothing in the Companies Act 2006 or in the model articles you were given the afternoon the company was formed takes a share back, breaks a 50/50 tie, or stops anyone selling 30% of your business to a competitor — a shareholder agreement is the private contract where the owners write those answers down while they are still on speaking terms.
The price is published: a shareholder agreement starts at £1,250 +VAT as a fixed fee, agreed in writing before anything starts, and that includes a read-through of your existing articles to check the two documents do not contradict each other. Drafting one is non-reserved work, so it does not need a solicitor — Buzz Legal Ltd is not a firm of solicitors and is not SRA regulated, and that is worth knowing up front. Two things sit outside the fee: tax advice on share structures or anything needing HMRC clearance, which is a job for your accountant, and a formal valuation of the company or of anyone's holding. And if the argument has already turned adversarial, with solicitors instructed or proceedings threatened, that is contentious work for RHF Solicitors (authorised and regulated by the SRA, no. 324115).
This is general legal information for companies in England and Wales, not advice on your set-up.
Want to know where you stand today? Our free shareholder agreement readiness check asks ten questions about founders, vesting, leavers, deadlock and drag/tag, and lists the protections you are missing.
Your company already has a rulebook: the Companies Act plus your articles of association. The trouble is what it is silent on. On a share sale the default is open — a shareholder can generally sell to whoever they like. On a founder who stops contributing, the default is that they keep everything. On a 50/50 disagreement, the default is that nothing passes and nothing happens. The agreement replaces 'whatever the law happens to say' with 'what the three of us decided while we still trusted each other', and it sits on top of the articles as a private contract between the owners and usually the company itself.
Strip out the boilerplate and a working agreement does six jobs. Knowing them is how you tell a real agreement from a template that only looks the part:
If you are a genuine sole owner with nobody joining, not yet — it governs relationships between owners and you have none. It starts earning its keep the moment any of this is true:
This is where a good agreement earns most of its money, because it decides who can end up sitting across the table from you. Four mechanisms do the work:
They balance each other. Drag protects the majority's exit, tag protects the minority from being stranded, pre-emption keeps ownership inside a known circle, and compulsory transfer covers the events nobody plans for.
The most common regret we hear is 'we never agreed what happens if one of us walks away'. Without leaver provisions, a co-founder can leave on day 400, do nothing further, and keep their full slice of everything you build over the next decade — including while competing with you. Agree the mechanism while everybody still thinks it is fair, because on the day you need it, nobody will.
Leaver provisions decide what a departing shareholder gets, and the amount turns on how they leave. A good leaver — ill health, redundancy, death — typically sells at fair value. A bad leaver — dismissed for misconduct, or in breach of the agreement — may have to sell at a lower figure, sometimes only what they originally paid. The definitions are the whole ball game, because the line between the two is exactly what people argue about.
Vesting is the related idea that founders earn equity over time instead of owning it all on day one. The common structure is four years with a one-year cliff: leave inside twelve months and you keep nothing, leave after two years and you keep half. Between friends it feels harsh. It is also the only fair answer to the co-founder who disappears after six months and expects to keep a third of the company for ever.
An agreement is only as good as its definitions. 'Fair value', 'good leaver', 'material decision' — unless each is pinned to an actual mechanism, such as a named valuer, a formula or a percentage threshold, you have written down the argument rather than the answer. The drafting that looks like lawyerly fuss is the part that stops the fight.
By default the largest holding wins most votes. Reserved matters are the defined list of decisions that need more than that — a supermajority, or the consent of a named shareholder. The usual list:
This is how a minority owner stops being steamrollered and how a majority owner stops a co-founder committing the company to something reckless. Draw the list to match the decisions that could genuinely hurt someone. Too long and routine sign-offs need a summit; too short and it protects nobody.
Owners fall out over money more than anything else, so say how it comes out: whether dividends follow a written policy or are declared ad hoc, how founder salaries are set and reviewed, and what happens to the shareholder who cannot or will not put more cash in when the company needs it. The agreement cannot override the Companies Act rule that dividends come only from distributable profits, but it can settle the argument about whether and how much before it starts. The tax treatment of any of this is a question for your accountant, not for us.
An even split with no tie-breaker is a company waiting to seize up: no resolution passes, no dividend is declared, no director is hired, no lease is signed. Without a mechanism the remaining routes are a negotiated buyout, an unfair prejudice petition, or a just and equitable winding-up petition, which ends the company in order to settle the argument. An agreement can install a casting vote in defined circumstances, an escalation to mediation, or a buy-sell mechanism — the 'Russian roulette' family, where one owner names a price and the other chooses whether to buy or sell at it, which is brutally effective because the person setting the price might end up on either side of it. None of these is comfortable. All of them beat paralysis.
The silent third — Three founders each took a third of a design agency. Two ran it full-time; the third drifted away after a year and kept her 33%. Three years on the active pair had built it to £600k of revenue and wanted to raise money, but the investor wanted a clean cap table and the absent founder would not sell at the price offered. With no pre-emption, leaver or drag provisions there was no mechanism to use, the round stalled for months and nearly died. A good-leaver clause and an agreed valuation method, settled on day one, would have closed it in a fortnight.
The 50/50 stand-off — Two equal owners of a manufacturing firm disagreed about whether to reinvest profit or take it as dividends. Every vote tied. Nothing could be decided — not the reinvestment, not a new hire, not the accounts without friction. The firm drifted for eight months while turnover slid, and the eventual break-up cost both of them far more than conceding early would have. A deadlock clause pointing to mediation and then a buy-out mechanism would have forced a clean answer in weeks.
Your articles are the company's public constitution, filed at Companies House and readable by anyone, including competitors and prospective employees. The agreement is private, which is where the commercially sensitive material belongs: dividend policy, salary expectations, leaver terms. Where the two conflict, things get expensive quickly, and the frequent failure is off-the-shelf articles that permit exactly the share transfer the new agreement was written to prevent. That is why reading the articles is part of the job rather than an optional extra, and why they often need amending at the same time. Whoever signs any of this off should keep their directors' duties under sections 171 to 177 of the Companies Act 2006 in mind; the agreement does not displace them.
You do not need a 60-page investment-grade document to protect two founders and a small option pool. Book a legal review: it is a free call, and it ends with a straight answer on what your set-up actually needs — often that the articles are the bigger problem. The agreement itself starts at £1,250 +VAT, fixed against a written scope covering decision-making, deadlock, dividends, exit provisions, restrictions on transferring shares to outsiders and the read-through of your articles. For context, at the £200 to £350 +VAT an hour commonly quoted for this work, that fee is between about three and a half and six hours. One point of principle before you start: we act for the company, not for individual shareholders, so each owner should take their own advice before signing.
Do you need a shareholders’ agreement? · A director’s seven legal duties · Shareholder agreement readiness check · Fixed-fee work and prices
This is general legal information, not advice on your situation. For advice tailored to your business, book a legal review. Buzz Legal provides non-reserved business legal support; reserved legal activities are carried out by RHF Solicitors, authorised and regulated by the SRA (no. 324115).
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Entirely what your agreement says, which is why the drafting matters more here than anywhere else. With good-leaver and bad-leaver provisions, shares can be bought back on agreed terms — at market value for someone who leaves well, at a lower or nominal value for someone who does not. With vesting, unearned equity is clawed back if they go early. Without any of it, the departing owner keeps their full stake whatever they do next, including competing with you, and the people still working in the business spend the next decade building value for someone who left. That is the single biggest reason to do this early.
No. A company runs on its articles of association, and thousands operate for years with nothing else. The real question is what the default answers are when something happens, and the model articles are close to silent on the things owners fall out about: whether a departing founder keeps their shares, how a 50/50 disagreement gets broken, whether anyone can be made to sell, and who can block a major decision. Without an agreement, a founder who walks out in month six generally keeps their full stake for ever. That single fact is why most multi-owner companies eventually put one in place, usually later and more expensively than they should have.
The articles are the company's public constitution, filed at Companies House and readable by anyone, including competitors and prospective employees. The shareholder agreement is a private contract between the owners, so it can carry the commercially sensitive material: dividend policy, salary expectations, leaver terms, and what each owner is expected to contribute. The two must be drafted to work together, and where they conflict the position gets messy quickly. A frequent and expensive failure is off-the-shelf articles that permit a share transfer the new agreement was written to prevent, which is why a read-through of the articles is part of the job rather than an optional extra.
Reserved matters are a defined list of significant decisions — issuing new shares, taking on major borrowing, selling the business or a substantial asset, changing what the business does, appointing or removing directors — which the agreement says require a higher level of consent than a simple majority. They give a minority owner a genuine veto over the decisions that would materially affect them, which the Companies Act does not provide by default. Draw the list with care. Too long and routine decisions need unanimity, which is how a company stops functioning; too short and it offers no real protection. It should reflect what the minority is actually worried about.
Without a mechanism, nothing happens — and that is the problem. An even split with no casting vote means no resolution passes, the company cannot make decisions, and the remaining routes are a negotiated buyout, an unfair prejudice petition, or a just and equitable winding-up petition, which ends the company in order to settle the argument. An agreement can put in a chairman's casting vote, an escalation to mediation, a buy-sell mechanism where one owner names a price and the other decides whether to buy or sell at it, or a pre-agreed exit route. None of them are comfortable. All of them are better than paralysis.
Yes, and plenty of companies do — typically when an investor asks for it, a new co-founder joins, or someone finally raises the question everyone has been avoiding. It is harder later for an obvious reason: the terms are a negotiation, and by then everyone knows what they stand to lose. Agreeing that a leaver hands back equity is straightforward when the company is worth little and difficult when it is worth a great deal. It is still worth doing, and worth doing before the next event rather than during it, because agreements written under deal pressure end up reflecting the deal's priorities rather than yours.
A shareholder agreement starts at £1,250 +VAT as a fixed fee, agreed in writing before anything starts, and that includes reading your existing articles to check the two documents agree with each other. Drafting it is non-reserved work, so no solicitor is required. Two things sit outside the fee: tax advice on share structures and anything requiring HMRC clearance, which goes to your accountant, and a formal valuation of the company or of anyone's holding, which is a separate exercise. One point of principle before you start — we act for the company rather than for individual shareholders, so each owner should take their own advice before signing, and an already-adversarial dispute goes to RHF Solicitors.
Clear scope · fixed fees available. Buzz Legal Ltd is not a firm of solicitors and is not regulated by the SRA.