Buying 30% of a Singapore startup: what shareholder rights and exit terms should I insist on?

Thank you for reaching out with your question. When investing in a tech startup, particularly one where you're being offered a significant share (30%) through a share subscription, it’s essential to carefully consider the protections you’ll have as an investor, even if the founders claim that no shareholders' agreement is necessary and that the constitution (or articles of association) will suffice. A shareholders' agreement is a common way to formalize key rights and obligations that go beyond what is typically covered in the constitution.

Here are a few key protections you should ask for or clarify, even in the absence of a formal shareholders' agreement:

1. Board Seats:

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  Board Representation: You should seek the right to appoint at least one director or observer to the board, especially if your investment gives you a significant stake (30%). This will give you direct oversight into the company's operations and strategic decisions.

  
  


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  Major Decisions: Ensure that certain major decisions (e.g., raising further capital, acquisitions, changes to the business model, or any decisions that significantly affect shareholder value) require your approval, or at the very least, consultation with you as a shareholder.

  
  

2. Information Rights:

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  Financial Information: You should request regular, detailed financial reports (quarterly or annually), including profit and loss statements, balance sheets, and cash flow statements.

  
  


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  Access to Key Documents: Ask for the right to access important company documents, including budgets, business plans, board meeting minutes, and material contracts. This helps you stay informed and ensures transparency.

  
  


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  Right to Audit: If you feel it’s necessary, request a right to audit the company’s financials or appoint an auditor, especially if the startup is raising more capital or facing significant risk.

  
  

3. Dilution Protection:

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  Anti-Dilution Rights: Ensure that you have anti-dilution provisions in place, particularly for future rounds of financing. These provisions will protect your equity stake from being significantly reduced if the company issues more shares at a lower valuation (down rounds). There are different types of anti-dilution protection, such as weighted average or full ratchet.

  
  


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  Pre-Emptive Rights: Ask for pre-emption rights, which would allow you the option to participate in future funding rounds to maintain your 30% ownership, preventing your stake from being diluted by new investors.

  
  

4. Exit Strategy / Liquidity Event:

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  Exit Rights: You should negotiate exit provisions to protect your interests if the founders decide to sell the company or take it public. This may include:

  
  
  
  
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    Tag-Along Rights: If the founders sell their shares, you should have the right to sell your shares on the same terms (so you’re not left behind in a sale).

    
    
  
  
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    Drag-Along Rights: These would allow the majority shareholders (typically the founders) to force you to sell your shares if they decide to sell the company. However, you should ensure that this only happens under reasonable terms and that you’re not forced to sell at an undervalued price.

    
    
  
  
  
  


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  Exit Timeline: It’s also worth discussing the company's long-term plans and what kind of exit strategy they foresee—whether that’s an acquisition, IPO, or other forms of liquidity events. If an exit is not likely in the near future, you may want to negotiate an agreed-upon timeline or milestones that will trigger a liquidity event.

  
  

5. Other Protections:

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  Founder Vesting: Ensure that the founders have a vesting schedule for their shares, meaning they must earn their ownership over time (typically 4 years with a one-year cliff). This prevents them from leaving the company early with a large equity stake.

  
  


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  Non-Compete/Non-Solicitation: Include clauses that prevent the founders from starting a competing business or poaching employees or clients if they leave the company, particularly if the company is sold or acquired.

  
  


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  Conflict Resolution: Make sure there’s a dispute resolution mechanism in place, such as mediation or arbitration, in case disagreements arise between shareholders, directors, or other parties.

  
  

While it’s possible to rely on the constitution for certain matters, a shareholders' agreement will typically provide more flexibility, detail, and enforceable rights, especially as the business grows and encounters challenges. I highly recommend seeking legal advice to ensure that these protections are properly incorporated into the legal framework of the company.

Good luck with your investment, and I hope these suggestions help safeguard your interests!

Sincerely,

Ascendance International Consulting