SSHA (i.e., Subscription and Shareholders Agreement) is a contract between the founders, investors and the company detailing the terms and conditions of the investment and the rights and obligations of the founders, investors, and the company.

The purpose of the SSHA is to create a framework for relations between shareholders and the operation of the company. The agreement helps to protect the interests of each shareholder by providing essential tools for managing risks and preventing potential conflicts between shareholders.

Usually, the SSHA includes and details the clauses agreed in the termsheet (if such a document has been signed). You can read more about the termsheet here .

What does an SSHA include?

First and foremost, an SSHA details how the investment will be made - i.e., the invested amounts, the percentage in the company received by investors, any tranches/stages of the investment.

At the same time, the SSHA covers all the rights and obligations of shareholders (e.g. founders and investors) and explains the mechanisms for collaboration between them and the management of the company.

Protecting investor interests

Investors typically require several protection mechanisms - both in terms of control of the company, but also in terms of the next rounds of financing, a potential exit or in the event of liquidation.

Such mechanisms are:

• making certain decisions conditional on investor votes – for example, certain decisions that cannot be made without an investor vote (e.g., attracting new investments, selling assets, taking out loans).
• appointment of a director to the Board - for example, investors can appoint one out of three directors.
• anti-dilution clauses for subsequent funding rounds - for example, investors’ shares are not diluted at all or partially diluted and the respective dilution is borne by the founders.
• exit or liquidation preference – for example, in the case of an exit, investors recover their investment first, and what remains is divided proportionally with shareholdings to all shareholders (including investors).

Regulating the transfer of shares

The SSHA sets the conditions and restrictions on the transfer of shares. It may involve prior approvals or pre-emption rights.

The SSHA may also contain clauses:

• drag along (i.e., a clause allowing a shareholder to oblige the other shareholders to join in a sale of shares on the same terms and conditions - e.g., if a majority shareholder receives an offer to sell his shares conditional on the other shareholders selling their shares, the drag along shareholder can oblige the other shareholders to sell as well);
• tag along (i.e., a clause allowing a shareholder to join in a sale of another shareholder’s shares on the same terms and conditions - e.g., if a majority shareholder receives an offer to sell its shares, a tag along shareholder can oblige that majority shareholder to include it in the sale);
• call option (i.e., a clause allowing one shareholder to buy a number of shares from another shareholder, who is obliged to sell them - e.g., an investor has an option to buy a number of shares from the founders);
• put option (i.e., a clause allowing a shareholder to sell a number of shares to another shareholder - e.g., an investor may request such a right in order to be able to sell shares to the founders at a pre-determined price if he wants to ensure that he can quickly “exit” the company).

Resolving conflicts between shareholders

The SSHA sets out the mechanisms for resolving conflicts between shareholders - in other words, what happens if shareholders disagree. The most common solutions are:

• buy-out mechanisms (i.e., the right of one shareholder to buy out the shares of another shareholder under certain conditions - e.g., in case of repeated disagreements over decisions, one shareholder has the right to buy out the shares of another shareholder either at a predetermined price or at a determinable price);
• bad-leaver or good-leaver mechanisms (i.e., mechanisms that resolve the exit from the company of some shareholders, usually founders - for example, the parties may agree that if a shareholder stops working in the company and wants to leave, he will be considered a bad leaver, in which case the other shareholders can buy his shares at nominal value).

Creating an option-pool

SSHA may establish mechanisms for forming the option pool for granting shares to key employees (e.g., percentage of shares forming the option pool, how it is formed, etc.).

As a rule, this option-pool is 10% and the respective shares are allocated and held by the founders.

Warranties and representations

At the same time, the SSHA usually contains certain warranties and representations of the founders in order to protect investors in possible disputes or with regard to certain risks.

Such warranties/representation may concern, for example:

• Intellectual property aspects: the founders declare that all intellectual property belongs to the company and that they have not infringed any third-party rights.
• Contractual risks - the founders declare that there are no dispute/liability risks in respect of commercial contracts executed or in progress.

As a founder you should pay close attention to the clauses and mechanisms included in an SSHA, as they can be critical in the future:

• on the one hand, the rights granted to first investors can also directly influence the rights of subsequent investors - for example, if you have granted certain preferences to one investor, the next investor will most likely ask for them too;
• on the other hand, mechanisms to resolve disputes between shareholders can save your company in a potential conflict - sure, at first it may all seem extremely nice, especially driven by the excitement of an entrepreneurial journey and the potential of your idea; but often shareholders’ perspectives and priorities change along the way and disagreements arise; at such times, it is critical to have mechanisms in place to resolve conflicts so that the company is not damaged.
• at the same time, be very careful about the warranties and representations you offer - some of them could be very risky for you.