What are SHAs?
When an investor commits to funding the company, he enters into a Share Subscription and Shareholders Agreement with the founders and the company. Both agreements are often combined into one, and the abbreviation SHA is often used to refer to both the share subscription and the shareholders agreement. Ultimately, terms of SHA are incorporated into the articles of association.
Why should entrepreneurs/ advisors care?
- Although you may successfully raise investment from a Venture Capitalist (VC) or Angel Investor, you may get it on terms you had not expected (it is possible that you realize this later, at a stage when you cannot reverse the transaction). You do not want to give excessive control over the company to investors, You do not want the investor’s claiming disproportionate rights in the company or rights that may make day to day operations difficult or uncertain.
- Remember – the first round of funding is critical as it sets the base standard that subsequent investors can follow. If an entrepreneur gives away too much, investors in subsequent rounds (such as a Series B or Series C round) will ask for comparable rights.
Therefore, the ability to negotiate or advise entrepreneurs is important. A consultant or a lawyer can add significant value to a transaction by assisting an entrepreneur during the negotiation process.
Clauses entrepreneurs should negotiate in an SHA
- Personal liability of the promoters
- Rights attached to the shares – Right to be nominated to the board, decisions on which their consent is required, etc.
- Rights to receive financial and other information pertaining to the business – should not be too onerous
- Exit related rights – what actions the company will take so that investors are able to make a profitable exit over their investment horizon (most investors have a short-term investment horizon of 3-5 years, over which they expect to make significant profits from their investment).
The investor wants assurance that investment will be protected, and an opportunity to make a profitable exit. An entrepreneur wants some level of freedom and flexibility while conducting the day-to-day operations of the business. These are not necessarily conflicting objectives.
[This podcast is created by Abhyudaya Agarwal and Pallavi Pareek, co-founders of iPleaders. Started in 2011 with the vision to make law accessible, iPleaders is currently teaching practical aspects of business law to entrepreneurs, managers, working professionals, engineers and innovators. It started an online diploma course in Entrepreneurship Administration and Businsess Laws in collaboration with NUJS, one of the best law universities in India in July 2011. Enrolments to the second batch of diploma course are now open. Visit http://startup.nujs.edu for more details.]