Why your shareholders' agreement isn't enough if a founder dies

Most founders now accept they need a shareholders' agreement. It sets the rules between you while everyone is alive and (more or less) on speaking terms. Far fewer have thought about what happens to the shares if someone dies or becomes seriously ill – and that's where the real trouble usually starts.

A cross-option agreement is the bit that answers that brutal "what if?" question. Without it, you can easily end up co-owning your business with a grieving spouse or adult children who never signed up for the ride.

The brutal "what if" nobody wants to talk about

Imagine a very typical setup:

• Two founders, 50/50 shareholders.
• They have a shareholders' agreement covering exits, leavers, drag/tag, deadlock – all the good stuff.
• One of them dies unexpectedly.

Legally, those shares are an asset like any other. Unless you've put something else in place, they usually pass under the will or intestacy rules. In practice, that often means a spouse or children inherit the 50% stake.

Now the surviving founder is still running the business day to day, but:

• Needs the spouse's consent for big decisions, dividends and any sale.
• May have no cash, and no right, to buy those shares back.
• Is trying to negotiate a sensitive exit with a family who may be emotional, suspicious or simply overwhelmed.

No one planned that scenario. It's just the default.

What a cross-option actually does

A cross-option agreement sits alongside your shareholders' agreement and answers one question: what happens to the shares if a founder dies or becomes critically ill?

In broad terms, it does two things:

• Call option (for the survivors). If a shareholder dies, the surviving shareholders (or the company) have the option to call for the deceased's shares at an agreed value.
• Put option (for the estate). The deceased's estate has the mirror right to put those shares to the surviving shareholders at the same value.

So instead of inheriting a long-term, illiquid minority stake, the family can choose a clean cash exit. And instead of being stuck in limbo with a new co-owner who never wanted the role, the surviving founder can take back control on pre-agreed terms.

Most cross-option arrangements are designed to dovetail with life insurance. The usual pattern is:

• Each shareholder is covered by a life policy written in trust.
• If one dies, the policy pays into the trust, not straight into the company.
• The cross-option allows that money to be used to buy the deceased's shares at the agreed valuation.

The family gets the cash. The survivors get the shares. The company's balance sheet is largely untouched.

Why founders and families both win

Done properly, a cross-option is not about one side "winning" the negotiation. It is about locking in something everyone can live with while heads are cool.

For founders, it means:

• You don't wake up one day sharing control with a spouse, ex-spouse or adult child who doesn't work in the business.
• You have a clear route to buy those shares at a price and timetable everyone has already agreed.
• You avoid deadlock and uncertainty at exactly the time the business needs stability.

For families, it means:

• They receive a defined cash amount, not an opaque shareholding they can't value or sell.
• They aren't forced into being quasi-directors or negotiators just to get fair value.
• The buy-out is funded and structured, instead of dependent on what the surviving founder can scrape together.

It is one of the few areas where the interests of the business and the family genuinely line up if you sort it early.

Common mistakes founders make

A few patterns come up again and again:

1. "We've got life insurance but no cross-option."
The policy may pay out, but if there's no mechanism tying it to a share sale, you can still end up in knots over who owns what, when the buy-out happens, and at what value.

2. "We've got something in the shareholders' agreement – that's enough, right?"
Your shareholders' agreement can set rules on death and exit between the shareholders while they are alive, but it does not stop the shares passing under a will. If the documents don't line up with a cross-option and the insurance, you can create tax and practical issues rather than solving them.

3. "We'll sort it later."
Later often means "after the first health scare" or when someone's personal situation changes. At that point, it is harder to get everyone round the table and much harder to agree "fair value" without emotion creeping in.

When a template is enough – and when you need a solicitor

A template-based approach can work if your situation genuinely is simple:

• 2–4 individual founders.
• One class of ordinary shares.
• No institutional investors or complex option schemes.
• Straightforward life cover arrangement, with everyone on roughly the same page.

If you already have, or are heading towards:

• Investors with their own term sheets.
• Multiple share classes, growth shares or EMI schemes.
• Trust or corporate shareholders.
• Cross-border elements or heavy tax planning.

then you are beyond template territory. You need a solicitor to look at the specific deal, the insurance and the tax picture together, and draft the shareholders' agreement and cross-option so they actually work in real life.

Speak to your own solicitor first. If you don't already have one, you can reach out to our friends at Bonsai Law for bespoke advice – there's no obligation, but they work on this kind of founder/shareholder planning all the time.