• An SHA is a legal document that delineates the rights, responsibilities, and obligations of shareholders of a company. Its primary function is to create a structured framework for governance and management while safeguarding the interests of both the investors and minority shareholders. The SHA serves as a crucial foundation for the company, setting clear governance guidelines, reducing the risk of disputes that could hinder progress, and fostering investor confidence in a transparent and stable organization.
• Apart from the constitutional documents of the company namely the Articles of Association and the Memorandum of Association; the SHA is another document that plays a vital role in establishing the relationship among the shareholders themselves and also between the investor shareholders and the company.
• The SHA should be drafted to cover all potential future scenarios, addressing critical aspects that the ompany must consider. For instance, it should clearly delineate the procedures for share transfers by investor shareholders, establish the board structure, outline mechanisms for facilitating exits for investor shareholders, and specify any restrictions on founders as well as the rights of shareholders inter se. This comprehensive approach ensures that all parties are adequately protected and that the governance of the company remains robust and effective

• Attracting investor interest - One of the initial challenges a founder faces is how to effectively pitch its value proposition to potential investors. The founders have to persuade the investors that their idea is worth investment, that there’s a clear problem-solution fit, that the business model is viable, and the founder have a competitive edge. Additionally, the founders may also have to customize their pitch for different types of investors—such as angel investors, VCs, or crowd funding platforms by addressing their specific criteria and expectations.
• Managing the due diligence - Investors generally conduct due diligence on the company before investing. During this critical stage, they verify and validate various aspects of the business, including financial statements, contracts, customer lists, the management team, technology, and intellectual property. This process can be both time-consuming and labour-intensive, requiring the submission of extensive documentation and responses to numerous inquiries. Additionally, addressing any shortcomings identified during the due diligence process is essential for moving forward.
• Getting the right valuation - Valuation of company is based on various assumptions and current scenarios in which company operates and the accuracy of valuation directly depends on closeness of such assumption to the real outcome at future date. Founders strive to get maximum valuation. On the other hand, investors shall be willing to invest at low valuation as they would seek more return for investing in such risky avenues.
• Regulatory challenges - Founders frequently encounter challenges in securing foreign investment, as they must navigate various FEMA regulations before obtaining funding. Additionally, they need to address compliance requirements and consider the provisions of the Companies Act 2013 prior to the investment being credited to the company’s bank account. These compliance obligations can create hurdles for both new and experienced founders alike.

• Shares Vesting - A founder's shares are generally locked for a certain period of time post the investment wherein the founders in that period cannot sell/transfer their shares. These shares are vested with the founder according to a vesting schedule stated in the SHA. If the founder decides to resign, the unvested shares may either expire or be transferred to an Employee Stock Ownership Plan (ESOP). Consequently, it is essential for the founder to carefully review the vesting schedule and negotiate the pertinent clauses. If a founder plans to transfer their shares or resign before the vesting period ends, they could face significant challenges. To protect their interests, the founder should contemplate negotiating for provisions that allow for accelerated vesting or pro rata vesting in the agreement.
• Good leaver, bad leaver - Good Leaver and Bad Leaver clauses address the clauses which deal with the scenarios when founders leave the company under different circumstance. Good leaver as the name suggests means when the founder leaves the company due to reasons beyond their control, such as health issues, disability, death. On the other hand bad leaver deals with scenarios when a founder’s employment is terminated for reasons such as a material breach of contract, misconduct, or prior to achieving a significant milestone. Generally, in bad leaver scenarios, the founders are required to transfer their shares to an ESOP or allow the company to buy back their shares. It is crucial for founders to closely examine this clause and consider negotiating to minimize its impact under bad leaver circumstances.
• Board Rights - Investor investing in the company is granted board director rights depending on their shareholding and the value addition in terms of industry knowledge the investor director can get on the company board, allowing them to appoint a director and participate in voting on company matters. The founders must ensure that the investor-appointed director can effectively manage the company and contribute to its growth. It is essential that the perspectives and decision-making approaches of both the company’s director and the investor’s director are aligned.
• Information and Inspection Rights - This is a standard right that requires the company to provide financial information, such as MIS and balance sheets etc, and inspection rights where investor is granted the right to visit and inspect the company's premises. Founders should consider who will cover expenses related to these visits, such as travel and food costs and other such related costs.
• Affirmative Matters - This right granted to investor shareholders stipulates that the company cannot make certain decisions without prior approval from the investor shareholders regarding the matters outlined in the affirmative matters list. It is essential for founders to carefully review this list, as some items may be unnecessary for the company. For instance, requiring investor shareholders’ approval for a loan of INR 2 lakhs may be excessive, especially during a company's growth phase. In such cases, the founder should negotiate to have this clause removed or to increase the threshold amount, as a loan of just 2 lakhs may be insufficient. Founders should ensure that the affirmative matters do not extend excessively into daily operations or strategic decisions that should remain in their control.
• Exit Rights - A founder should be very mindful when it comes to provide an exit to the investor shareholders. Founders should ensure the agreement includes provisions that offer sufficient opport unities for the company and founders to provide exits to investor. These might include buy- ask options, secondary sales, or initial public offerings, tag and drag along rights etc. Exit is a mandatory right which are provided to the investor shareholders however, there remains room for negotiation for founders. For example, a founder may request an extension of the exit period or ensure that the terms of the drag sale include a fair market valuation, protecting minority shareholders from being dragged. By doing so, the founder can alleviate some of the obligations associated with these rights.
• Drag-Along Rights - Drag-along rights are common in venture capital agreements, designed to protect investors' interests. Drag-along rights are a protective mechanism for investors. They ensure that when a majority shareholder decides to sell their shares, minority shareholders are obligated to sell their shares on the same terms. This mechanism prevents minority shareholders from blocking a sale and guarantees a streamlined exit for investors. From a founders prospective rag-along rights can be a double-edged sword. On one hand, they can facilitate a smooth sale process, which might be beneficial for everyone involved. On the other hand, founders could find themselves forced into a sale they are not entirely comfortable with, potentially losing control over the company's future.

FACTS: WestBridge (“Investor”) invested in People Interactive (India), the parent company of Shaadi.com (“Company”) through its WestBridge Ventures II Holdings fund in 2006 and accordingly the parties had entered into an SHA. The Investor had invested in the Company as lead investor of the Company.

Being the lead investor in the Company, the SHA granted the Investor exit rights and drag along rights. A generally standard exit clauses states that if the founder is not able to provide an exit to the investors within the stipulated exit period, then after the exit period the investor may transfer its shares to any third party including the competitors of the company.

Issues arose when the Investor entered into talks with People Interactive’s competitor, Info Edge, to sell its shares, as the company failed to buy back the shares of the Investor. Info Edge runs another matchmaking platform, Jeevansathi.com, which is a direct competitor of the company. This is in compliance with the terms of the SHA, as the SHA’s exit clause states that if the company fails to facilitate an exit within the exit period, the concerned investor is free to sell shares to anyone, including competitors.

In October 2021, the Investor issued a drag-along notice to the founder, enforcing their drag-along rights. The enforcement of these rights would require the founder to sell his shares alongside the Investor.

This implementation of the drag-along provision could pose significant risks to the company's future, as it may facilitate a takeover by Info Edge. Should Info Edge's Jeevansathi.com acquire a majority stake, it could spell the end for the company's founders.