30 May 2025

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THE VENTURE-BACKED GROWTH COMPANY LEGAL PLAYBOOK:
KEY CONSIDERATIONS FOR SCALING COMPANIES

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By David Cameron, Managing Partner, David Cameron Law Office (DCLO)

 

Introduction

Many early-stage companies focus on growth and fundraising but overlook legal risks until they become a problem. A solid legal foundation helps avoid costly mistakes, protects your company’s assets, and ensures you’re prepared for investors, employees, and regulators.

 

Common Legal Pitfalls Growth Companies Face

• Raising capital without clear founder agreements, leading to disputes

• Granting equity without proper documentation, causing cap table confusion

• Signing unfavorable contracts with customers, vendors, or investors

• Ignoring employment and intellectual property (IP) protections

• Expanding internationally without considering regulatory implications

 

The five key legal areas covered in this series are:

1. Employee Stock Ownership Plans (ESOPs) and Incentive Plans (available via this link)

2. Fundraising and Equity Structuring (available via this link)

3. Founder and Shareholder Agreements (this article)

4. Regulatory and Compliance Considerations

5. Exit Strategies and M&A Considerations

 

This third installment will take a deeper look into Founder and Shareholder Agreements..

 

Legal Considerations Following a Capital Raise (Part 3 of 5):Founder and Shareholder Agreements

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As companies scale, misalignment among founders or shareholders can create significant legal and operational friction. Early agreements are often informal or incomplete, leading to misunderstandings around control, equity, and roles. A robust Founder and Shareholder Agreement helps define the rights, responsibilities, and expectations of key stakeholders, reducing the risk of conflict and positioning the company for long-term success.

 

In Hong Kong and other Asian markets, where startups often include cross-border founders or regional investors, careful drafting is critical to reflect commercial realities and comply with local law.

 

Key Components of a Founder Agreement

A founder agreement typically precedes or is incorporated into the broader shareholder agreement. It is especially important during the early stages of company formation. Key terms include:

 

• Roles and Responsibilities: Clearly defined operational roles (e.g., CEO, CTO, CFO) to avoid overlap or ambiguity.

 

• Equity Allocation and Vesting: Shares granted to founders should be subject to time-based or milestone-based vesting to incentivize long-term commitment.

 

• Decision-Making Authority: Outline how decisions will be made—unanimous, majority, or by role-based authority (e.g., CEO decisions on operations).

 

• Founder Departure and Succession: Address what happens if a founder leaves voluntarily or involuntarily, and who may step in operationally or economically.

 

Founders should also consider IP assignment, confidentiality, and non-compete obligations to ensure the company owns its core assets and has legal recourse if a founder departs.

 

Core Terms in a Shareholder Agreement (SHA)

The shareholder agreement is the central document governing relations between all shareholders—including founders, employees, and investors. In Hong Kong, this agreement works alongside the company’s Articles of Association, which may need to be amended to reflect the SHA.

 

Common terms include:

 

• Governance and Voting Rights: Specify how the board is composed, how directors are appointed or removed, and how key decisions are approved.

 

• Transfer Restrictions: Pre-emption rights, rights of first refusal, and tag-along / drag-along provisions help control who joins the cap table and facilitate orderly exits.

 

• Reserved Matters: Require shareholder or board approval for significant actions—such as issuing new shares, borrowing above thresholds, or selling assets.

 

• Information Rights: Clarify access to financials, board minutes, or KPIs—often tied to investor protections.

 

• Dividend Policy: Determine whether profits will be reinvested or distributed, and who decides.

 

• Deadlock Resolution: Particularly important in 50/50 ventures or closely held startups, include mechanisms such as escalation, mediation, or buy-sell provisions.

 

In Hong Kong, care must be taken to ensure SHA terms are enforceable and consistent with statutory company law and the Articles of Association.

 

Founder Vesting and Leaver Provisions

Vesting is not just for employees—founder shares should also vest over time to reflect ongoing contributions. In early-stage companies, founder departures are a common source of tension, especially when an unvested founder retains a significant stake.

 

Key points to address include:

 

• Good Leaver vs. Bad Leaver: Define these terms clearly, as they determine whether a departing founder retains or forfeits unvested shares.

 

• Buyback Rights: Grant the company or other founders the right to repurchase shares at fair value or nominal value, depending on the departure circumstances.

 

• Succession Planning: Identify potential successors or outline a process for appointing operational replacements, especially if the company is founder-led.

 

Properly structured vesting and leaver terms are essential to maintain morale, incentivize commitment, and ensure continuity.

 

Minority Shareholder Protections and Drag Rights

As the shareholder base expands, it’s important to balance investor protections with operational control. While founders and early investors often hold majority positions, minority shareholders may seek additional rights to protect their investment.

 

These may include:

• Anti-Dilution Protections: Typically negotiated in investor rounds but may also apply to early shareholders.

 

• Exit Rights: Tag-along rights protect minority holders in a sale, while drag-along rights enable majority shareholders to force an exit.

 

• Class Rights: Different share classes may carry varied voting, dividend, or liquidation preferences, which must be reflected in both the SHA and Articles.

 

In Hong Kong, company law allows for considerable flexibility in class rights—but these must be clearly drafted and properly authorized to be effective.

 

Best Practices for Founders and Shareholders

 

To build a strong foundation and avoid future conflict, companies should:

• Formalize founder roles, equity, and responsibilities early

• Use vesting and leaver provisions to incentivize commitment

• Ensure SHAs and Articles are aligned and compliant with Hong Kong law

• Anticipate investor expectations—particularly around governance and exits

• Avoid excessive minority protections that may block future rounds or sales

• Revisit and update agreements periodically as the business evolves

 

How DCLO Can Help

At David Cameron Law Office (DCLO), we work with startups and growth-stage companies across Hong Kong and Asia to draft founder and shareholder agreements that are both practical and enforceable. Whether you are starting from scratch, preparing for a funding round, or onboarding a strategic investor, we help ensure your documentation is aligned with your growth trajectory and compliant with legal requirements.

 

Looking Ahead

In the next article of this five-part series, we will explore regulatory and compliance considerations—focusing on how companies can avoid legal pitfalls while scaling across Hong Kong and Asia.

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​For any questions or additional information, please feel free to reach out to the author David Cameron at david.cameron@dc-lo.com.

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