Shareholder agreements, subscription agreements, term sheets and IP transfer agreements

Once you have negotiated and signed back the term sheet, the process of ensuring that you have all the proper legal documents will begin. Several key documents must be drafted, negotiated and finalized before the investor will cut a cheque for your business.

If you have negotiated a comprehensive term sheet with the investor, most of the key points should already be agreed to before drafting the documents. Engage experienced and knowledgeable legal counsel once you begin negotiating the term sheet to make sure that the process runs as smoothly as possible.

Documents you’ll need in “Series A” equity financing

“Series A” equity financing includes a subscription agreement, a shareholder agreement and articles of amendment that establish one or more new classes of shares to be issued to the investors. Other ancillary documentation may include registration rights, founder stock restriction agreements, new employment agreements for key employees, a stock option plan and a management rights agreement. For financing led by a U.S. investor, provisions usually included in a shareholder agreement may be included in two separate agreements—a stockholder agreement and a voting agreement.

IP Transfer agreement

The IP transfer agreement may be included if there is intellectual property (IP) either being licensed or assigned from another party. For an early-stage company, this is often the only tangible asset. Have an IP lawyer review the documentation to make that the license the assignment has been properly executed. Proper ownership of IP can make or break future financing transactions, M&A or IPOs.

Two key agreements: Shareholder and subscription agreements

A shareholder’s agreement defines an agreement among the shareholders of the company. It regulates the following matters:

  • Management of the corporation—such as size and composition of the board of directors and related procedural matters
  • Procedural matters—including frequency of board meetings and quorum
  • Covenants of the corporation—including obligations with respect to the information provided to investors and acquisition and maintenance of directors and officers liability insurance
  • Dealing with shares—clearly setting out any restrictions or obligations related to the transfer of shares
  • Provisions for the resolution of any future disputes between shareholders

A subscription agreement provides the details of the purchase price for the security. It also includes the representation and warranties that each party will make to each other as part of the agreement. These“reps and warranties” are statements that one party gives certain assurances to the other, and on which the other party can rely.

A representation is a statement of a fact; a warranty is more of an assurance. Make sure that you understand the legal ramifications of the representations and warranties. As part of the subscription agreement, you will prepare disclosure schedules (or schedule of exceptions). This is a very important document, as you will be listing or disclosing all of the relevant information required as part of the legal agreement.

Things you should know

  • The investors’ lawyer usually prepares the first draft of the legal documents. The documents provide additional detail on the points negotiated in the term sheet. If you negotiated a comprehensive term sheet, then there should not be many surprises during the drafting of the legal documentation.
  • It is critical to manage the closing of the transaction. Every day spent trying to close the transaction will cost you time and money. The legal fees for both your counsel and the investors’ counsel come directly from the proceeds of the investment. Management is ultimately responsible for managing all the parties involved in the transaction (for example, investors, attorneys, university).
  • Request a closing agenda up front. Use this document to manage the process. Assign one person the responsibility for each item listed in the agenda.
  • Ask advisors to help you understand which items are negotiable and which are not.
  • To save transaction costs, try pulling together the information required and drafting the first turn of the disclosure schedules.

Useful links


Houston, T., Johnson, A., & Smith, E. (2006, September 15). Technology Startups: A Practical Legal Guide for Founders, Executives and Investors. Retrieved April 9, 2009, from Fraser Milner Casgrain website at , now available at