The real weight of the clauses that take up two lines in a term sheet becomes apparent when the shareholders’ agreement reaches the table. The shareholders’ agreement (SHA) is the truly long-lived document of a venture round: while the investment agreement is largely spent once closing happens, the SHA governs the relationship between the shareholders for years, usually until the next round or an exit.
In negotiations, the parties’ energy tends to go into valuation; yet what shapes a founder’s daily life is not the valuation but the SHA’s veto list, transfer restrictions and vesting provisions. The mistake we see most often in practice is a founder signing this document quickly as “standard wording” and discovering how its machinery works only at the first dispute.
Below are the ten points that must be discussed in any SHA negotiation, grouped into five clusters: where the provisions will live, the fate of the shares, control and transparency, the founder’s undertakings, and what happens when things break down.
Start with point ten: where will the provisions live?
The question usually left to the end, though it affects everything, is whether a provision stays in the SHA or moves into the articles of association. The SHA is a contract under the law of obligations; as a rule it binds only its parties, and the typical consequence of breach is damages. The articles are part of the corporate order: registration makes them public, and they create a foundation that reaches the company’s organs and third parties acquiring shares.
In practice the difference means this: a transfer made in breach of a restriction that lives only in the SHA may well remain valid at the corporate law level; you hold a damages and penalty claim against the breaching shareholder, but the return of the shares is not guaranteed. Well-structured deals therefore reflect the critical provisions into the articles so far as possible, and reinforce those that clash with the mandatory rules of the Turkish Commercial Code with penalty clauses at the contractual level. Which provision lives in which layer is the technical but most durable question of the negotiation.
The fate of the shares: transfer restrictions, ROFR, tag and drag
The first four points govern how shares change hands. It starts with transfer restrictions: founder shares are typically locked for a period or until exit; the investor wants the team it has backed not to drift away by selling down. The right of first refusal, the ROFR, obliges a selling shareholder to offer the shares to the existing shareholders first, on the same terms; unless periods and notice mechanics are drafted precisely, every attempted sale drags on for months.
Tag-along protects the minority: if the majority sells, the minority may join the sale on the same terms. Drag-along protects the exit: if a defined majority decides to sell, the minority can be compelled to sell too. For the founder, a drag needs three safety catches: a sensible trigger threshold, a minimum price or valuation condition, and identical terms for all shareholders in the sale. Without them, the drag can become the vehicle for a cheap exit against the founder’s will.
Across all four mechanisms the same Turkish law question recurs: whether the provision sits only in the contract or has been carried into the corporate layer as well. The TCC permits, under certain conditions, restrictions on the transfer of registered shares through clauses placed in the articles; but the full range of contractual pre-emption and co-sale structures does not fit that mould. The practical solution is layered: the restrictions that can be moved into the articles are moved, the rest are backed with penalty clauses, and annotations on the share certificates and in the share register weaken any good-faith claim by a third-party acquirer.
Where does the veto list swell, and where do information rights shrink?
Point five is the list of matters requiring investor consent, the protective provisions. Issuing new shares, amending the articles, selling the company, material borrowing and large off-budget spending are natural members of this list. The list starts to swell when ordinary commercial decisions creep in: hires, routine supplier contracts, pricing. The healthy test in negotiation is whether the item protects the value of the company or hands its management to the investor. Calibrating thresholds to the company’s real volume of business, and preventing the list from growing automatically round after round, is the founder’s most legitimate ask.
Point six is information rights: monthly or quarterly financials, the annual budget, an audit right. For the investor it is a legitimate need; for the founder the measure is whether the reporting burden matches the company’s actual capacity. Demanding monthly audited statements from an early-stage company turns the team into reporting clerks; providing nothing at all burns the trust away at the first crisis. The operating rules of the veto mechanism matter as much as its content: unless the agreement sets a reasonable period for the investor to respond, a deemed-consent presumption where no answer arrives within it, and an accelerated procedure for emergencies, a veto list that looks balanced on paper becomes, in practice, a handbrake on the company.
The founder’s undertakings: vesting and non-compete
Point seven is founder vesting. The investor knows it is backing a team rather than a company, and so wants part of the founder shares tied to time and to staying. In Turkish practice this is usually built as reverse vesting: the founder owns the shares today, but undertakes to transfer a portion back at a pre-agreed price on an early departure. The critical distinction is the manner of leaving: a founder removed for cause and a founder leaving for health reasons should not receive the same treatment. Good leaver and bad leaver definitions are the source of most of the disputes we see around founder departures. On the timetable side, market practice is relatively settled: vesting is usually spread over four years with a cliff for the first year, and acceleration on a sale of the company is negotiated separately. The question founders forget to ask is whether time served under earlier rounds counts as vested against the new investor; a clock that resets with every round turns the founder into a permanently probationary employee of their own company.
Point eight is the non-compete and non-solicitation undertakings. Given in the context of a shareholding relationship, these can be drafted more broadly than their employment law cousins; but they are not unlimited. A restriction that is disproportionate in duration, geography and field of activity risks being narrowed or struck down by a court. The practical advice for founders is to confine the scope to the field in which the company actually competes, and to resist the restriction continuing to run while the share price remains unpaid.
When things break down: deadlock and dispute resolution
Point nine is the scenario nobody wants to discuss on signing day: the day the shareholders can no longer agree. In fifty-fifty structures, or in companies where the veto list is in effect mutual, deadlock is a real risk. Agreements resolve it in stages: first mandatory senior-level discussion, then mediation, and finally buy-sell mechanisms under which one side ends up acquiring the other’s shares. Unless the price formula of these mechanisms is written precisely, the clause built to resolve the deadlock produces a fresh dispute.
The dispute resolution clause, part of point ten, is quiet but decisive: courts or arbitration? In deals with foreign investors, arbitration — institutions such as ISTAC in the Turkish context and the ICC internationally — is often preferred for confidentiality and enforceability. What the founder should know is that arbitration can be fast but expensive, and that the advance on costs raises the practical threshold for bringing a claim; for low-value disputes, a simplified procedure or a court carve-out can be negotiated.
To pull it together: the founder’s task in an SHA negotiation is not to win every clause but to understand the scenario in which each clause fires. Transfer restrictions and the ROFR decide the fate of the shares; the veto list and information rights shape everyday management; vesting and the non-compete govern the founder’s personal future; deadlock and arbitration provisions script the bad day; and the fit between the SHA and the articles is the load-bearing wall of the whole structure. Testing these ten points against your own company’s concrete numbers before signing — “would this veto threshold have caught our three largest transactions last year?” — turns the agreement from an abstract text into a working constitution. Running that test together with the investor, free of signing pressure, is the cheapest rehearsal available for the arguments to come.
This article is provided for general information only and does not constitute legal advice. Please seek legal support for an assessment of any specific matter.
Author
If this is on your desk
Templates and checklists are free in the Founder Academy; for a specific situation, book a 30-minute intro call.
Founder AcademyBook an intro call