Why Founders Delay Signing Shareholder Agreements (and How It Backfires)

In the early days of building a startup, it's not uncommon for founders to be full of vision and short on

paperwork. Everyone is energized, committed, and moving fast. Legal documents, especially

shareholder agreements, can feel like bureaucratic hurdles standing in the way of innovation. The

thinking goes: "We trust each other," "We're not making money yet," or the infamous, "We'll sort it out

later." But later often arrives with a vengeance.

The Psychology of Delay: Trust, Optimism, and Avoidance

At the beginning, founding a company can feel like a romantic partnership. There's mutual admiration,

big dreams, and a powerful sense of shared mission. In that environment, formalizing ownership stakes,

control rights, and exit scenarios can feel like introducing a prenuptial agreement at a honeymoon.

Many founders delay because:

• They fear damaging the relationship: Talking about equity splits or vesting schedules can

feel confrontational. It requires founders to assign value to themselves and each other, which

can highlight uncomfortable imbalances.

• They don’t want to kill momentum: Early-stage teams often prioritize product development,

fundraising, or go-to-market efforts. Anything not directly tied to growth can feel like a

distraction.

• They assume goodwill will carry them through: “We’re friends” or “We’ve known each other

for years” is a classic blind spot. Unfortunately, the passage of time doesn't prevent disputes — it often amplifies them.

The Practical Reasons: Cost, Complexity, and Legal Fog

Aside from psychology, there are concrete reasons why founders avoid legal paperwork.

1. Legal fees: Good legal work isn’t cheap. For bootstrapped startups, spending thousands on a

shareholders’ agreement can feel hard to justify when compared to, say, hiring a developer or

buying marketing tools.

2. Confusion: Many founders don't fully understand what a shareholders’ agreement should

contain — or even why it’s different from articles of association or cap tables. That lack of

clarity leads to inaction.

3. Paralysis of choice: If the founding team is made up of three or more people with different

ideas about governance, share classes, or decision-making, the process can stall while trying to

reach consensus — and often never resumes.

What Happens When Founders Don’t Formalize

When things go well, a missing SHA seems invisible. But the moment tension arises, the absence of

structure becomes glaring. Here’s what can (and often does) go wrong:

1. Equity Disputes

Without a signed agreement, who owns what can quickly become ambiguous. This is especially

dangerous if verbal promises were made, or emails vaguely reference “splitting everything equally.”

Disputes over ownership are common — and expensive — especially if the company becomes valuable.

2. Deadlock and Decision Paralysis

A SHA sets out who makes which decisions, how board members are appointed, and how voting works.

Without one, you may find yourself stuck in a 50/50 deadlock with no mechanism to break it.

3. Founder Departures

One of the most catastrophic scenarios is a co-founder leaving early — but still holding equity. Without

a vesting schedule baked into a SHA, they could walk away with 25%, 33%, or more of the company

on day one. That’s dead equity: they’re no longer adding value but are still benefiting disproportionately.

4. Investor Disinterest

No serious investor will put money into a company without clean, documented founder arrangements.

If a SHA isn’t in place, it signals immaturity, and most VCs will walk away rather than get involved in your drama.

So, When Should Founders Sign?

Immediately. A SHA is not a “when we raise” or “when we scale” document — it should be executed

as soon as shares are being divided, shareholders registered and responsibilities agreed.

Even a simple SHA covering:

• Shareholding structure

• Founder vesting and cliffs

• Voting rights and reserved matters

• Exit and drag-along rights

• IP ownership and founder commitments

…can save a company from future collapse. It can (and should) be revisited as the company grows, but not having anything in writing is reckless.

Final Thought: Paper Before Product

The most successful founders aren’t just great at building — they’re great at protecting what they build.

That means taking early legal steps seriously, even when they feel premature. Relationships change.

People leave. Success brings stress, not just celebration.

So do yourself a favor: Have an SHA. Your future self will thank you.