When forming a corporation in California, shareholder agreements, which regulate the legal ownership rights of shareholders in a corporation and typically provide for restrictions on the transfer of shares and provisions that govern the shareholders’ management of the corporation, are commonly the most negotiated formation document. Though these are among the most common purposes behind formalizing a shareholder agreement, shareholder agreements are highly versatile and allow companies substantially more utility than provided in the brief description above.
For instance, Zenefits FTW Insurance Services, a San Francisco-based human resources/insurance broker software startup that was once “deemed by some to be the fastest growing software startup in Silicon Valley history,” recently amended their shareholder agreement to increase the combined stake a certain group of investors held in the company, while at the same time cutting the company’s valuation by more than half. In exchange for conceding the additional equity at a significantly lower valuation, Zenefits required in the new shareholder agreement for these particular shareholders to “sign a release of claims against the company,” a recognition that the company was open to potential lawsuits from shareholders after it emerged earlier this year that co-founder Parker Conrad, who has recently resigned, “had written a software program, called ‘Macro,’ that helped employees circumvent state licensing requirements.” The development of this issue with Macro subsequently spurred regulator investigations into Zenefits’ business practices. In addition to efforts made by Zenefits to report problems related to ‘Macro’ to regulators, to repair its licensing systems, and to terminate employees involved with the program, the amended shareholder agreement serves to afford Zenefits additional protection from its shareholders regarding Macro as it moves forward.
When forming a corporation, it is impossible to anticipate the type of problems faced by Zenefits or any circumstances that might affect shareholder relations five or ten years down the line. It is possible, however, to create the best shareholder agreement for your business at this point in time and then amend or replace it with a new shareholder agreement when circumstances change and dictate a new set of terms for the corporation’s shareholders, as was the case with Zenefits. If you are forming a corporation in California, Your Contract Lawyer can help walk you through important considerations specific to your business’s circumstances that can help shape a detailed and versatile shareholder agreement or amendment to your current shareholder agreement.