While every business is different, many of the startups that we work with have a few things in common:

1. There are two (or more) founders;
2. They have taken some initial investment from family and friends;
3. They are building out a product, and intend to seek formal venture funding;

Since they were released in 2015, the Australian Venture Capital Association Limited (AVCAL) Seed Round docs have been very popular. The stated goal of the documents is to:

short-cut the “to and fro” of trading documents and use a set of documents as a balanced, well-informed starting point - ideally with time and costs being reduced significantly

I commend our colleagues at K&L Gates for their hard work - I think they have succeeded in this goal of setting some useful standards for the venture capital industry in Australia. Working on the startup side, we have found that the AVCAL terms commonly set useful benchmarks for investment discussions.

The documents have become so well known that our clients often come to us with the AVCAL Shareholders Agreement already sourced and signed. Unfortunately, Shareholders Agreements require unanimous consent to amend, so it has been our experience that an inappropriate shareholders agreement is often worse than no shareholders agreement at all.

Here are some of the things we think it’s important for startups to know, before they implement anything:

1. the AVCAL documents assume there will be “Seed Round Investors”, and that they will be taking “Preference Shares”. That might not be true for your business, and even if it does have an investor, it may be too soon to be handing out preference shares.
2. founder vesting starts when you sign, regardless of how old you business is or how much money you’ve personally funnelled into the business. You can set the percentage (its marked up), but even so, this might be fine for some, but not everyone (or even everyone equally within a single business).
3. the list of business decisions requiring the agreement of 75% or more of the board are pretty exhaustive. If you have investors on your board, this means a substantial loss of day to day control. If you don’t, it means keeping extensive records of meetings with your cofounders - something nearly nobody does.
4. The document gives right of first refusal on new issues of shares to all shareholders. If the company is closely held, no big deal, if you have a lot of shareholders (or might in the future), you’ll want to restrict this right - it’s quite onerous chasing down waivers from countless smaller investors, or having to wait out a notice period before you can close an investment round (that might go cold!)

The long and short of it is that these documents are to support a seed fundraise from a formal venture capital fund (or a sophisticated group approximating one). Until that time comes, a simpler shareholders agreement might be more appropriate.