Crowdfunding shareholder agreements: what they are for

An equity crowdfunding campaign is a financial transaction that generates a profound change in a company's corporate structure. When a company raises venture capital online, in fact, it may find itself welcoming dozens or hundreds of new members: those who invest in the campaign acquire a stake in the company and become, for all intents and purposes, partners.

This capital-raising model introduces a new complexity: the management of partner relations. With many investors, often small and distributed, it becomes critical to establish clear rules on governance, rights, and transfer of shares.

To do so, a valuable tool is the shareholders' agreements. These are agreements between members that regulate fundamental aspects of corporate life and allow for balance to be maintained between founders and investors. In the context of crowdfunding they are a particularly important tool for ensuring stability in governance and preventing future conflicts.

In this article we will look at What crowdfunding shareholder agreements are and what they are for, which clauses they most frequently include, and what errors to avoid in defining them.

What are shareholders' agreements

I shareholders' agreements are agreements made among some or all of the members of a company to regulate their behavior in relation to the company's shareholding: contracts that determine how to exercise certain rights or how to handle certain future situations in the company.

These agreements are located “alongside” the corporate charter, hence the term parasocial.

Bylaws contain the official rules of the company, while shareholders' agreements more specifically regulate the relationship between the shareholders who sign them.

What are they for 

Shareholders' agreements have a very practical function: stabilize relationships between partners and prevent conflict situations.

Among their most common goals are:

• Coordinate members' behavior in strategic decisions
  
• Regulate the entry or exit of new members
  
• avoid decision blocks
  
• Protect investors or founders in specific circumstances.
  

In many investment transactions involving capital stock - venture capital, private equity or crowdfunding - these agreements are an essential tool for ensuring that all stakeholders share certain ground rules.

The most common clauses 

A shareholders' agreement can include many types of clauses, but some are particularly recurrent.

Some of the most common include:

• voting clauses, which stipulate how members engage in voting on certain decisions;
  
• share transfer clauses, which regulate the sale or transfer of holdings;
  
• governance clauses, which regulate the composition of corporate bodies and the powers of shareholders.

These tools make it possible to anticipate and regulate situations that may arise over time, preventing them from becoming a source of conflict among members.

Shareholders' agreements for crowdfunding: why they matter

When a company raises capital through an equity crowdfunding campaign, its corporate structure changes significantly. L’entry of numerous investors involves new governance requirements and makes it necessary to establish clear rules on rights, decisions, and relationships among members.

This aspect is one of the distinguishing features of crowdfunding from other forms of capital raising. If a company raises money from an investment fund or a few business angel, the membership remains relatively simple to manage (although decision-making power can shift significantly). In crowdfunding, however, the number of members can grow rapidly.

Shareholders' agreements serve precisely this function: Organize and make manageable a potentially very large membership.

The risk of fragmentation of governance

A company with many small members may face some operational difficulties:

• more complex decision-making processes
  
• Increased risk of conflicts among members
  
• difficulty in handling assembly votes
  
• Uncertainty in extraordinary transactions (sale of the company, capital increase, entry of new investors)

Without clear rules, the presence of numerous members can Make governance less efficient And slow down strategic decisions.

Not only that, for a possible professional investor, like a fund, a company with fragmented and cumbersome governance loses its attractiveness.

For this reason, it is very common in equity crowdfunding transactions to introduce contractual instruments that enable the Coordinate the behavior of members.

The role of shareholders' agreements

Shareholders' agreements allow some basic rules of corporate life to be defined in advance, creating a Balance between the needs of founders and those of investors.

Through these arrangements it is possible:

• Determine how certain voting rights will be exercised
  
• regulate the transfer of shares
  
• Define information rights for investors
  
• Establish mechanisms to manage any extraordinary operations

In the context of crowdfunding, therefore, shareholders' agreements are a legal instrument that represents A design element of post-campaign corporate governance.

A clear and well-defined structure not only facilitates the management of the company over time, but can also increase the confidence of potential investors, who see their rights recognized and regulated.

The clauses for crowdfunding

The most commonly used clauses in crowdfunding shareholders' agreements mainly concern three areas: share transfer, corporate governance, and investor protection.

Share transfer clauses

One of the most sensitive issues in corporations with many members concerns the sale of shareholdings. Shareholders' agreements often regulate these situations through specific clauses.

Some of the most common include:

• Tag along (right of co-sale)
  If a majority shareholder decides to sell his or her share, minority shareholders can also participate in the sale under the same conditions.
  
• Drag along (obligation to co-sell)
  If a given majority decides to sell the company, the other shareholders must also join the transaction. This prevents a few partners from blocking a strategic sale.
  
• Lock-up period
  Provides for an initial period during which shares cannot be sold. Serves to provide stability to the membership after the campaign.

These clauses are particularly useful in crowdfunding because the presence of many shareholders might otherwise make extraordinary transactions such as the entry of new investors or the sale of the company difficult.

Governance clauses

Another group of clauses concerns the Functioning of corporate bodies and strategic decisions.

Shareholder agreements can stipulate, for example:

• mode of appointment of directors
  
• Voting rights on certain major decisions
  
• Particular quorums for certain transactions.

The purpose is avoid deadlocked decision-making situations and maintain a balance between those who run the business and those who have only invested capital.

In crowdfunding, this is especially important because governance must remain efficient even with a large membership base, and strategic decisions cannot involve even small investors, often with no experience in the matter. From this point of view, one form of protection is already in place upstream: the Differentiation between type A shares (with voting rights) and type B shares (without voting rights), plus any additional types to be defined in the bylaws.

Investor protection clauses

Finally, many shareholders' agreements include investor protection instruments.

Among the most common:

• periodic information rights, which oblige the company to Provide updates on the progress of the activity;
  
• right of first refusal, which allows members to purchase shares offered for sale before they are offered to third parties;
  
• anti-dilution clauses, designed to limit the impact of future capital increases on investor participation.

These clauses help make the investment more transparent and predictable, elements that are particularly important when investors are numerous and often do not participate directly in the management of the company.

Mistakes to avoid when managing shareholders' agreements in crowdfunding

Shareholder agreements are a useful tool for organizing corporate governance after a crowdfunding campaign, but their effectiveness depends greatly on how they are designed.

Unclear or unbalanced arrangements can generate operational difficulties or reduce the attractiveness of the offer to investors. For this reason, it is important to avoid some rather frequent mistakes.

Shady deals

In crowdfunding, many investors are retail investors, that is, people who do not professionally do investment work.

The shareholders' agreement is often excessively Long, technical or difficult to interpret for this type of investor. If a potential investor has difficulty understanding what rights he or she is acquiring, what limitations are in place, and what scenarios might occur in the future, he or she may lose confidence in the company and decide not to participate in the campaign.

More knowledgeable investors, on the other hand, might notice ambiguously or incompletely drafted covenants.

Overly complex or poorly maintained documentation can therefore become an obstacle to participation in the campaign. It is important that the document is legally correct but also readable and transparent: that is why it is useful to draft the covenants precisely and accompany them with ancillary documentation of explanation, within the crowdfunding campaign.

Unbalanced clauses between founders and investors

Another frequent mistake is to insert clauses that protect founders almost exclusively.

It is understandable that those who created the company want to maintain a strong control over governance, but if the shareholders' agreement excessively restricts investors' rights, it may create two problems:

• Reduce the confidence of potential investors
  
• make the offer less competitive with other investment opportunities.

In crowdfunding, it is important to strike a balance: the company must remain manageable by the founders, but investors must have adequate guarantees.

Lack of consistency between bylaws and shareholders' agreements

A more technical but very relevant error concerns the Consistency between corporate bylaws and shareholders' agreements.

Bylaws are the official document of the company and set out the formal rules of operation. Shareholder agreements, on the other hand, are agreements between shareholders that supplement or specify certain rules.

If the two documents are not consistent with each other, several problems may arise:

• difficulties in applying the clauses
  
• interpretive uncertainties
  
• Possible disputes between members.

Therefore, it is critical that bylaws and shareholders' agreements be designed in a coordinated way, especially when preparing a crowdfunding campaign.

Practical tips for structuring effective shareholders' agreements in crowdfunding

Establishing shareholders' agreements should not be a formal step tackled at the last moment before launching a campaign. On the contrary, it is an important part of the design to be defined well before starting to prepare the operational part of the campaign.

Define the governance strategy first

Even before the shareholders' agreement is written, it is useful for the founders to clarify some basic aspects of future governance.

For example:

• What role the founders will maintain in strategic decisions
  
• What rights will be given to investors
  
• Which decisions will require special majorities
  
• How any extraordinary transactions will be handled

Defining these elements in advance helps to build a shareholders' agreement consistent with the company's development strategy.

Simplify the structure for crowd investors

As we have already mentioned, in crowdfunding, the audience of investors is often composed of people with heterogeneous financial skills different from those of insiders. For this reason, it is important that the governance rules are clear and understandable.

This means:

• Avoid unnecessarily complex clauses and accompany the necessary ones with an explanatory document
  
• Transparently explain the rights and limitations provided
  
• Make future situations easily interpretable by giving practical examples (e.g., sale of the company or new capital increases).

Integrating covenants into campaign strategy

Shareholder agreements are part of the investment proposal that the company presents to the market.

While it is true that when an ordinary investor evaluates an equity crowdfunding campaign, he or she looks primarily at the reward and growth forecasts, in fact, there is a phase in which it consults more or less accurately on the conditions of the investment.

For this reason, it is useful for the rules contained in shareholders' agreements to be consistent with:

• the evaluation of the company
  
• the rights granted to investors
  
• The company's growth strategy.

A clear and well-designed layout helps make the proposal more credible.

Embed the equity crowdfunding campaign within the broader long-term growth and financing strategy of the company also means going beyond the horizon of the operation itself and paving the way for whatever comes next.