Nobody starts a business expecting to fall out with their co-founder. You're too busy building, selling, surviving. The shareholders' agreement goes on the "we should really get round to that" list, somewhere between updating the website and filing your confirmation statement on time.
Here's the problem: most companies at Companies House don't have one. And when things go wrong — which they do, eventually, in ways nobody predicted — there's no framework for what happens next. Exit terms, valuation, who stays involved: all left to statute, the articles (which most founders have never read), and whatever you can negotiate under pressure.
Here are five things that go wrong when you skip the paperwork.
1. Deadlock — and nobody can break the tie
You and your co-founder own 50% each. You're both directors. You disagree on something fundamental — a new hire, a pivot, taking investment, selling the business. Neither of you will budge.
Without a deadlock mechanism in a shareholders' agreement, you're stuck. The company can't move forward. Decisions don't get made. Invoices pile up. Clients notice.
In the worst cases, this ends with a winding-up petition — one of you asking the court to shut the company down because it's the only way out. That's not dramatic exaggeration; it happens. And it's expensive, slow, and public.
What a shareholders' agreement does: Sets out a deadlock procedure. Options include escalation to an independent third party, a "shoot-out" mechanism (one party names a price, the other chooses to buy or sell at that price), mediation, or — as a last resort — a structured wind-down. The point is: there's a process, agreed in advance, when everyone was still friends.
2. A founder leaves — and keeps their shares forever
One of your co-founders leaves. Maybe they got a better job offer. Maybe they just stopped showing up. Maybe you fell out.
Without leaver provisions in a shareholders' agreement, they stay on the share register indefinitely. There's no obligation to sell. No mechanism to value their shares. No distinction between someone who gave five years and left on good terms, and someone who quit after six months and badmouthed the company on the way out.
You're now running a business with a ghost shareholder who has voting rights, dividend rights, and opinions about what you do — but no involvement in making it happen.
What a shareholders' agreement does: Includes "good leaver" and "bad leaver" provisions. A good leaver (retirement, long service, death, disability) gets fair market value. A bad leaver (gross misconduct, resignation within a vesting period, breach of duties) gets less — sometimes nominal value. The agreement sets out exactly who qualifies as which, and how shares get valued and transferred.
3. Someone starts competing — and there's nothing you can do
Directors have fiduciary duties to the company. Shareholders don't — not automatically.
So if a shareholder (who isn't a director) decides to set up a rival business, poach your clients, or hire your best staff, there may be very little you can do about it. They can sit on their shares, collect dividends, and compete directly — all at the same time.
Even if they are a director, the statutory duties aren't always enough. They're broad, they're open to interpretation, and enforcing them means litigation.
What a shareholders' agreement does: Includes restrictive covenants — non-compete, non-solicit, non-deal clauses — that bind shareholders personally. These aren't automatic; you have to agree them. And they have to be reasonable to be enforceable. But having them in writing, signed by everyone, makes your position much stronger if someone decides to go rogue.
4. Death, divorce, or illness — and shares end up with a stranger
Your co-founder dies. Their shares pass under their will — or, if they don't have one, under the intestacy rules. Your new business partner might be their spouse, their estranged sibling, or someone you've never met.
Or: your co-founder gets divorced. Depending on how the financial settlement goes, their ex could end up with a chunk of the company.
Or: they lose mental capacity. Someone else — a deputy appointed by the Court of Protection, or an attorney under a lasting power of attorney — is now making decisions on their behalf.
None of these people chose to be in business with you. You didn't choose them either.
What a shareholders' agreement does: Includes transfer restrictions and (ideally) a cross-option agreement. The cross-option gives surviving shareholders the right to buy, and the deceased's estate the right to sell, at an agreed price — usually funded by life insurance. For divorce and incapacity, the SHA can require transfers back to remaining shareholders, or give a right of first refusal.
5. Minority shareholders get frozen out — and go nuclear
You own 30%. The other founders own 70%. They stop inviting you to board meetings. They vote themselves big salaries. They issue new shares that dilute you down to nothing. They make decisions that benefit them at your expense.
Without protection, your options are limited. You can complain. You can threaten. And if it's bad enough, you can bring an unfair prejudice petition under section 994 of the Companies Act 2006.
Section 994 claims are expensive, slow, and unpredictable. They involve detailed disclosure, witness evidence, and a judge deciding what's "fair". They also become public record — which tends to make investors, customers, and future co-founders nervous.
What a shareholders' agreement does: Builds in minority protections from the start. Reserved matters (things that need unanimous consent, not just a majority). Anti-dilution provisions. Tag-along rights (if the majority sell, you can sell too, on the same terms). Information rights. The SHA doesn't stop people behaving badly — but it gives you leverage and options before you reach the courtroom.
What now?
If you've read this far and realised you don't have a shareholders' agreement — or you have one from ten years ago that nobody's looked at since — now is a good time to fix that.
The Contract Studio UK's Shareholders' Agreement Pack gives you everything you need:
- Comprehensive shareholders' agreement template (plain English, designed for English & Welsh law)
- Cross-option agreement
- Deed of adherence for new shareholders
- Nominee declaration of trust
- Directors & shareholders guide
- How-to guide for using the pack
Get the Shareholders' Agreement Pack →
If you're already in a dispute, this isn't the right tool — you need proper legal advice, not a template. We can introduce you to Bonsai Law if you need handholding.
But if you're still on speaking terms with your co-founders and want to get the boring stuff sorted before it gets expensive? This is where to start.
Related Templates for Founders
Setting up with co-founders? Get our Shareholders' Agreement Pack – SHA, cross-option agreement, deed of adherence and how-to guides for UK startups.