Subscription Agreement And Stockholders Agreement: Practical Review Points For US Businesses

US founders and operators face critical decisions when raising capital or managing ownership.

Two documents come up repeatedly: the subscription agreement and the stockholders agreement (sometimes called a shareholders agreement). Many startups sign these documents quickly, assuming templates or investor-provided drafts are sufficient. However, missing the differences between these agreements, overlooking state law requirements, or failing to align them with your company documents can lead to costly disputes or regulatory issues. This guide explains what each agreement does, practical review points, common mistakes, and concrete steps for US businesses to protect their interests.

What Is a Subscription Agreement?

A subscription agreement is a contract between a company and an investor that sets the terms for the investor to purchase shares in the company. It is most often used during fundraising rounds, such as seed, Series A, or later-stage investments. The agreement details the number and type of shares, the price per share, payment terms, and any conditions that must be satisfied before the shares are issued.

At the federal level, the Securities Act of 1933 requires that most securities offerings be registered with the SEC unless an exemption applies. Most early-stage startups rely on exemptions like Regulation D (Rule 506(b) or 506(c)), which allow for private placements without full SEC registration. However, even if an exemption applies, the subscription agreement must be accurate, not misleading, and must include certain investor representations, such as confirming accredited investor status if required by the exemption.

• Key elements: Number and class of shares, purchase price, payment method, investor representations (such as accredited investor status), company representations (such as authority to issue shares), and conditions precedent (such as board or stockholder approval).
• Who signs: The company (usually by an officer or director) and the investor.
• When used: In most private fundraising rounds, convertible note conversions, or SAFE (Simple Agreement for Future Equity) conversions.

State contract law also applies. The enforceability of certain terms, such as waivers or transfer restrictions, can depend on the law of the state where the company is incorporated. For example, Delaware law generally gives companies flexibility, but California and New York may impose additional requirements or investor protections. Some states require specific language for transfer restrictions to be enforceable against third parties.

Example: A Delaware C-corp raising a seed round may use a subscription agreement that includes a representation that the investor is an accredited investor under Regulation D, a condition that the board must approve the issuance, and a clause stating that the agreement is governed by Delaware law.

Common mistakes:

• Using a generic template that does not match your state law or fundraising structure.
• Failing to include all required investor representations, such as confirming accredited investor status.
• Not specifying payment details or conditions precedent clearly.
• Overlooking state blue sky law filings, which may be required in addition to federal exemptions.

What Is a Stockholders Agreement?

A stockholders agreement (or shareholders agreement) is a contract among the company and some or all of its stockholders that governs how the company is managed, how shares can be transferred, and how key decisions are made. Unlike a subscription agreement, which is about buying shares, a stockholders agreement is about managing the ongoing relationships among shareholders after the shares are issued.

• Key elements: Voting rights, board composition, restrictions on share transfers, rights of first refusal, tag-along and drag-along rights, information rights, and dispute resolution mechanisms.
• Who signs: The company and some or all stockholders (sometimes only certain classes or types of investors).
• When used: Often adopted at the time of a significant investment, or when there are multiple founders or classes of investors.

There is no federal law requiring a stockholders agreement, but state corporate law, such as the Delaware General Corporation Law (DGCL), California Corporations Code, or New York Business Corporation Law, sets the baseline for what is allowed or required. For example, some states restrict the enforceability of certain voting arrangements or transfer restrictions. The agreement must also be consistent with the company's certificate of incorporation and bylaws.

Example: In a Delaware C-corp, the stockholders agreement may require that certain major decisions (such as selling the company or issuing new shares) require approval by a supermajority of stockholders. It may also restrict transfers of shares to prevent unwanted third parties from becoming shareholders, and provide for drag-along rights so that minority shareholders can be required to sell if the majority agrees to a sale.

Common mistakes:

• Failing to update the agreement as new investors come on board.
• Not aligning the agreement with the certificate of incorporation or bylaws, leading to conflicting provisions.
• Overlooking state law requirements for transfer restrictions or voting arrangements.
• Not specifying how disputes will be resolved or which state's law governs the agreement.

Key Differences Between Subscription and Shareholder Agreements

Although both documents are often signed during the same fundraising round, they serve very different purposes and should not be combined into a single contract. Here are the main differences:

• Purpose: The subscription agreement covers the purchase of shares; the stockholders agreement covers the ongoing relationship among shareholders.
• Timing: The subscription agreement is signed before or at the time of investment; the stockholders agreement may be signed at the same time, but its provisions apply going forward.
• Parties: The subscription agreement is between the company and the investor; the stockholders agreement is between the company and some or all shareholders.
• Content: The subscription agreement covers price, payment, and representations; the stockholders agreement covers voting, transfers, and ongoing rights.

In practice, a new investor may be required to sign both documents as a condition of their investment. For example, a venture capital investor may sign a subscription agreement to buy shares and also sign a stockholders agreement to agree to voting and transfer restrictions. These documents often reference each other and may include cross-conditions (for example, the subscription closes only if the investor signs the stockholders agreement).

Enforceability caveats: Subscription agreements are generally enforceable as contracts for the sale of securities, subject to securities law. Stockholders agreements may be subject to additional requirements under state law, especially if they include voting trusts, proxy arrangements, or transfer restrictions. For example, under Delaware law, transfer restrictions must be noted conspicuously on the stock certificate to be enforceable against third parties. In California, certain transfer restrictions may be unenforceable if they are deemed unreasonable restraints on alienation.

Example of a conflict: If the subscription agreement says shares are freely transferable, but the stockholders agreement restricts transfers, this can create confusion or disputes later. It is critical to review both documents together and ensure they are consistent.

Practical Review Checklist: What to Look For Before Signing

Before signing a subscription agreement or a stockholders agreement, founders and investors should review several key points. Here is a practical checklist with explanations and examples:

• Scope: Does the agreement clearly state what shares are being issued or what rights are being granted? For example, is it clear whether the shares are common or preferred, and what rights attach to them?
• Payment: Are the payment terms clear? Is the price per share correct, and is there a clear process for payment (wire, check, escrow)? For example, does the agreement specify the bank account for payment and the deadline?
• Conditions Precedent: Are there any conditions that must be met before the agreement takes effect (such as board approval, minimum raise, or regulatory filings)? For example, does the agreement require that a minimum amount be raised before any shares are issued?
• Representations and Warranties: Are both parties making the necessary promises? For example, is the investor confirming they are an accredited investor, and is the company confirming it has authority to issue shares?
• Transfer Restrictions: Does the stockholders agreement restrict how and when shares can be sold or transferred? Are there rights of first refusal, tag-along, or drag-along provisions? For example, does the agreement require that shares be offered to existing shareholders before being sold to outsiders?
• Voting Rights: How are key decisions made? Are there supermajority requirements, board seat rights, or veto powers? For example, does the agreement require a 66% vote to approve a sale of the company?
• Dispute Resolution: Is there a clear process for resolving disputes, such as mediation, arbitration, or choice of law? For example, does the agreement specify that disputes will be resolved under Delaware law in Delaware courts?
• Alignment with Other Documents: Do the agreements align with the company's certificate of incorporation and bylaws? Are there any conflicts? For example, does the certificate of incorporation allow for the class of shares being issued?
• State Law Requirements: Does the agreement comply with the law of the state where the company is incorporated? For example, are transfer restrictions properly noted on stock certificates as required by Delaware law?
• Updates and Amendments: Is there a clear process for updating or amending the agreement as new investors come on board? For example, does the agreement specify how new investors will be added as parties?
• Investor-Specific Terms: Are there any special rights or obligations for particular investors, such as board observer rights or information rights?
• Confidentiality and Non-Compete: Are there confidentiality or non-compete clauses that could affect founders or employees?

Practical tip: Keep a spreadsheet or cap table that tracks which investors have signed which agreements and what rights they have. This can save time and confusion during future fundraising rounds or exits.

Common Mistakes and How to Avoid Them

Even experienced founders and investors can make mistakes with subscription and shareholder agreements. Here are some of the most common pitfalls, with practical examples and tips to avoid them:

• Using the wrong template: Not all agreements are created equal. For example, using a California template for a Delaware corporation may result in unenforceable terms. Always tailor agreements to your company's state of incorporation and specific deal terms.
• Failing to check state law: State corporate law can affect everything from how shares are issued to how voting rights are enforced. For example, New York requires written consent from all shareholders for certain actions, while Delaware is more flexible. Always check the law of your company's state of incorporation.
• Not updating agreements: As new investors join, agreements may need to be updated or amended. Failing to do so can leave some investors with different rights or obligations. For example, if a new investor is not added to the stockholders agreement, they may not be bound by transfer restrictions.
• Overlooking securities law: Even private offerings are subject to federal and state securities laws. Failing to comply can result in fines or forced rescission of the offering. For example, failing to file a Form D with the SEC or state blue sky filings can create regulatory risk.
• Ignoring conflicts with other documents: The certificate of incorporation, bylaws, subscription agreement, and stockholders agreement should all work together. Conflicts can lead to disputes or litigation. For example, if the certificate of incorporation allows for 10 million shares but the subscription agreement purports to issue 12 million, this is a problem.
• Missing key signatures: Agreements are only binding on the parties who sign them. Make sure all required parties have signed before closing the investment. For example, if a major investor does not sign the stockholders agreement, they may not be bound by its terms.
• Assuming all investors are the same: Some investors may require special terms, such as board seats or information rights. Make sure these are clearly documented. For example, a lead investor may require a board seat while other investors do not.
• Not keeping records: Failing to keep copies of signed agreements and a record of who has signed can create confusion during due diligence or exits. For example, during an acquisition, the buyer will want to see that all shareholders are bound by the same terms.
• Not planning for exits: Drag-along and tag-along rights are critical for ensuring a smooth sale of the company. Failing to include these can make it difficult to sell the company later.

How to avoid these mistakes:

• Always review agreements with a licensed attorney familiar with your company's state law and industry.
• Do not rely solely on templates or advice from non-lawyers.
• Update your agreements as your business grows and new investors come on board.
• Keep organized records of all agreements and signatures.
• Align all agreements with your certificate of incorporation and bylaws.

FAQs

Do I need both a subscription agreement and a stockholders agreement?

In most cases, yes. The subscription agreement covers the purchase of shares, while the stockholders agreement covers ongoing rights and obligations among shareholders. Both serve different purposes and are often required by investors during fundraising rounds. Some investors will not fund unless both agreements are in place and properly signed.

Can I use a template for these agreements?

Templates can be a helpful starting point, but they rarely fit all situations. State law, company structure, and investor demands can all affect what terms are needed. For example, a template may not include the specific transfer restriction language required by Delaware law. Always have a licensed attorney review any agreement before signing.

What happens if there is a conflict between the stockholders agreement and the company's bylaws?

If there is a conflict, the outcome depends on state law and the specific language of each document. In some states, the certificate of incorporation and bylaws take precedence over private agreements. In others, the stockholders agreement may control if all parties have signed. For example, Delaware courts often enforce stockholders agreements if they are clear and all parties have agreed, but inconsistencies can still create disputes. It is important to align all documents and seek legal review to avoid problems.

Are there special rules for issuing shares to non-US investors?

Yes. Issuing shares to non-US investors can trigger additional federal and state securities law requirements, as well as tax and regulatory issues. For example, the company may need to comply with the Foreign Investment in Real Property Tax Act (FIRPTA) or file additional reports. Always check with a licensed attorney before offering shares to investors outside the US.

How often should I update my stockholders agreement?

Stockholders agreements should be reviewed and updated whenever there is a significant change in ownership, a new fundraising round, or a change in company structure. For example, if you add a new class of preferred stock, the agreement should be updated to reflect the new rights. Keeping your agreements current helps prevent disputes and ensures all parties are on the same page.

Key Takeaways

• Subscription agreements and stockholders agreements serve different purposes and should be carefully reviewed before signing.
• Federal and state laws affect both types of agreements, and requirements can vary by state and industry.
• Common mistakes include using the wrong template, failing to check state law, and not updating agreements as the business grows.
• Always align your agreements with your company's certificate of incorporation and bylaws to avoid conflicts.
• Consult a licensed attorney for a review tailored to your company's needs and state requirements.
• Keep organized records and update agreements as your investor base changes.

If you are preparing a subscription agreement or stockholders agreement, or if you have questions about your current documents, our team can help you understand your options and next steps. For a confidential discussion, call (888) 449-8437 or email team@sprintlaw.com. Where legal services are required, they are provided by licensed US lawyers at ElevateNext US, LLC, a trusted US law firm, through the Sprintlaw platform.