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We are living in fascinating times for founders building scalable businesses in India and SEA
1. Sectors are opening up, getting organized and throwing massive opportunities for problem solvers.
2. regulations are increasingly getting liberalised.
3. technology advancements are removing barriers that once made building hard.
4. Lastly capital is easily available across stages of venture building.
As founders are going after these massive opportunities and raising large amounts of capital, it is important for them to realise that with each round of funding they are sharing not just ownership but also control of their company with their investors. While the former is obvious and well understood, the latter is often overlooked by founders.
SHA101 is a series that breaks down everything founders need to know about Shareholders' Agreements, from what an SSA, SPA and SHA actually are, to the rights, clauses and obligations buried inside them. These are legally binding documents that determine how much control you're giving away with every round you raise. The goal is simple, no founder should sign a definitive agreement without fully understanding what they're agreeing to.
If you have raised funds in the past or have tracked investments in startups, you would have definitely come across terms like: SSA, SHA, SPA or Definitive Agreements. Let's aim to demystify these terms in this blog.
In the context of investment, a 'definitive agreement' is the final, legally binding document signed by all the parties of the transaction which puts forth the agreed terms along with rights and obligations of the parties involved in the transaction. Some things to note:
1. Legally binding document. Typically executed on a Stamp Paper with appropriate stamp duty paid based on the local jurisdiction.
2. Signed by the relevant parties to the transaction.
3. Most Common Examples: Shareholders' Agreement (SHA), Share Subscription Agreement (SSA), Share Purchase Agreement (SPA)
4. A term sheet is not a definitive agreement. But in most cases, definitive agreements follow the signing of a term sheet.
5. Definitive documents are necessary and form the basis of consummating certain transactions such as sale of shares between parties, issuance of shares against investment among others.
6. Definitive agreements contain terms of the transaction, right and obligations of parties and many other standard legal clauses which we'll discuss in this blog series.
A Share Subscription Agreement (SSA) as the name indicates is related to subscription of new shares of the company by a set of existing or new shareholders. Points to note:
1. SSA is executed when a company is raising an investment from investors in lieu of shares issued by the company to the investors. Such shares are said to be 'subscribed' by the investors and hence the name SSA.
2. SSA typically consists of the details of the subscription amount, share price, number of securities, relevant dates and capitalization table (shareholding) details.
3. In some cases, SSA can also be integrated within the SHA document which details the other terms of the transaction between the shareholders. In such cases it is typically referred to as an SSA/SHA or also simply as SHA
A share purchase agreement (SPA) is executed between parties when one party is buying or 'purchasing' shares from existing shareholders. This is common in secondary transactions, where investors purchase shares directly from founders or early shareholders, rather than the company issuing new shares.
Like in case of SSA, sometimes SPA too is part of the larger SHA document and is referred to as SPA/SHA.
Shareholders' agreement is a comprehensive definitive agreement entered into by investors, founders/promoters, and the company and outlines the rights, preferences and obligations of all the shareholders.
While subscription of shares makes a shareholder the economic owner of the company, it is the provisions contained in the SHA that determines the extent to which the company and promoters are ceding the control and governance of the company to certain shareholders, typically the investors.
Some examples of such rights and preferences are:
1. Board Reconstitution, offering board seats to investors,
2. Liquidation preferences, anti-dilution, exit rights.
3. Reserved matters or affirmative rights of the investor,
4. Pre-emptive and share transfer rights, right of first offer (ROFO) and right of first refusal (ROFR) etc.
Apart from rights and preferences, SHA would also contain standard clauses around:
1. Breach, events of default by parties and termination
2. Reps & warranties, indemnity, confidentiality
3. Non-compete, promoter lock-in etc.
4. Dispute resolution, arbitration, governing law etc.
5. Shareholding pattern /cap tables, milestones and business plan in the Annexure
6. ESOP pool size and creation
Many founders confuse the SHA with the Articles of Association (AoA) or assume they cover the same ground. They don't.
The AoA is a public document filed with the registrar of companies (RoC) that governs the internal management of the company. Anyone can access it. The SHA on the other hand is a private, confidential contract between founders, investors and the company, it is never filed publicly.
Here is the simplest way to think about it:
Here's a quick breakdown so you never confuse them again
Many founders use SHA and termsheet interchangeably, but they are fundamentally different documents serving different purposes in an investment transaction.
You might have heard the analogy:
“Termsheet is like an engagement, while SHA is the actual marriage of sorts between the startups and investors in some sense.”
Here are a few more points that you can make note of:
1. Term sheet is intent: Term sheet is generally only a 'firm intent to invest' by the investor with the defined terms. It also is an abridged version of the eventual SHA/definitive agreement that parties would sign.
2. SHA is binding: However, SHA is a legally binding document and not abiding by it will constitute a breach.
3. Can investors renege on a signed term sheet? While investors can technically renege on a term sheet commitment, it is not an ideal situation. That said, there have been cases I have seen personally where a deal has not gone through post the execution of term sheet.
There can also be technical grounds on why deals fall through after signing of term sheets. Such as:
1. Period to accept: There is a max period of acceptance of a term sheet when an investor issues it (typically 2 week or lesser, could also be 4 weeks in some cases when one is closing a larger round).
2. Period to close round: There is also a maximum time to close the deal (in many cases it is the execution of definitive documents) which could be 8 weeks or 12 weeks. If startups don't accept or close the deal in these cases, the term sheet becomes no longer valid and investors have all the right to walk away.
Notwithstanding these max periods to accept/close, if the 'intent to invest' is strong then these timelines don't matter! I have seen a deal going through after 1.5 years of signing the term sheet!
1. Any conditions precedent to signing definitive documents not met: This could be any criteria like transfer of IP, hiring of key management, founders quitting their fulltime jobs etc. which are part of the term sheet.
2. Due diligence red flags: Investors do a formal due-diligence of the startups they invest in. This involves studying all aspects of a startup from a legal, financial, business and operational standpoint. Any inconsistencies, gaps are highlighted and need to be cured. Occasionally if the issues are severe, it might lead to the deal falling apart.
Investors sitting across the table have read these documents hundreds of times. For most founders, this is their first live transaction, with real stakes, compressed timelines and limited room for deliberation.
That asymmetry is worth acknowledging.
Ownership and control diverge much earlier than most expect. You can own 60% of your company and still need investor approval to hire a CXO, change your business model or raise your next round. The SHA is the document that determines exactly where that line sits.
A well negotiated SHA protects all parties, removes ambiguity before it becomes conflict and sets the foundation for a healthy founder-investor relationship.
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In the context of startup funding in India, SSA, SHA and SPA are the three key definitive agreements executed during an investment transaction. A share subscription agreement (SSA) is signed when a company issues new shares to an investor in exchange for capital. A share purchase agreement (SPA) is signed when existing shares are transferred from one shareholder to another. A shareholders agreement (SHA) governs the rights, obligations and governance of all shareholders after the investment is made.
An SSA involves the creation of new shares by the company, the investor subscribes to freshly issued shares, which increases the company's share capital. An SPA involves the transfer of existing shares from one shareholder to another, no new shares are created, and the company's share capital remains unchanged. In simple terms, SSA brings new capital into the company and SPA moves existing ownership between parties.
A shareholders agreement (SHA) is a legally binding contract between a company's founders, investors and the company itself. It governs how the company is run after an investment is made, covering board composition, voting rights, reserved matters, exit rights, anti-dilution provisions and share transfer restrictions. Unlike the cap table which shows who owns what, the SHA determines who controls what.
A term sheet is largely non-binding, it represents the investor's intent to invest rather than a legal commitment. However, certain clauses within a term sheet are legally binding even before the SHA is signed. These include confidentiality, exclusivity and governing law clauses. All commercial terms, valuation, investment amount, board seats and liquidation preference, are typically non-binding until the definitive agreements are executed.
Yes, investors can technically withdraw after signing a term sheet since most of its commercial terms are non-binding. Common reasons include due diligence red flags, conditions precedent not being met, or the deal not closing within the stipulated timeline, typically 8 to 12 weeks. That said, withdrawing without valid grounds damages investor reputation significantly in a relationship-driven ecosystem like India.
Yes. Equity percentage and control rights are two different things. An investor holding 10% equity can still have contractual veto rights over key decisions, such as raising new capital, appointing senior management or changing the business scope, if these are listed as reserved matters in the SHA. This is one of the most important distinctions founders must understand before signing.
In most structured funding rounds, the SSA and SHA are signed together, the SSA records the investment and share issuance while the SHA governs the ongoing relationship between shareholders. The SPA is signed alongside the SHA when the transaction involves a secondary component, where existing shares are being transferred in addition to new shares being issued. In some cases, all three are consolidated into a single document referred to as an SSA/SPA/SHA.
