Shares Allocation & Shareholder Agreement

• Example: Founders 70%, Investors 30%
  
• Advantages: Brings in capital and resources that can accelerate business’s growth, and reduces financial burden on founders
• Disadvantages: Founders’ shares are diluted. Investors may request board representation and input on major decisions, which could affect the company’s original direction

Shares are distributed based on each shareholder’s actual contribution like capital and labor. This method better reflects the real input of each shareholder.

Calculation examples:

• Capital contribution = actual amount invested
• Labor contribution = future salary × duration of service

Example 1:
Shareholder A invests RM100,000. Shareholder B provides labor valued at RM5,000 per month for 2 years (24 months), totaling RM120,000.

• Total contribution = RM220,000
• Shareholder A: RM100,000 ÷ RM220,000 = 45%
• Shareholder B: RM120,000 ÷ RM220,000 = 55%

Example 2:
Both shareholders contribute a combination of capital and labor. The shareholder agreement determines how much of the shares are allocated based on capital versus labor.

• Assume capital accounts for 65% of total shares and labor accounts for 35%
• Shareholder A contributes 70% of capital + 20% of labor
• Shareholder B contributes 30% of capital + 80% of labor
• Shareholder A: (70 × 65%) + (20 × 35%) = 52.5% of shares
• Shareholder B: (30 × 65%) + (80 × 35%) = 47.5% of shares

Advantages: Fairly reflects each shareholder’s contribution and motivates continued engagement from the team
Disadvantages: Calculating labor-based shares can be complex. The shareholder agreement must clearly outline exit mechanisms and procedures for future adjustments

Note: The above numbers are simply examples. Actual allocations should be determined based on the company’s shareholder agreement

A shareholder agreement is a crucial document that protects shareholder rights and ensures smooth company operations. Its purpose is to formalize commitments, prevent potential disputes, and support sustainable growth.

• Formalize Commitments: Document all agreements between shareholders to prevent future disputes
  
• Protect Rights and Responsibilities: Clearly define each shareholder’s rights regarding capital contribution, dividends, voting power, and responsibilities
  
• Establish Exit Mechanisms: Include share exit procedures and non-compete clauses to ensure departing shareholders do not disrupt company operations
  
• Prevent Misconduct: Legal clauses reduce potential risks and provide a secure operating environment
  
• Attract Investors: A clear agreement improves transparency and trust, making the company more attractive for investment
  

Although not legally required, a shareholder agreement is the most important protection for each shareholder and a cornerstone of long-term company stability

When deciding on shares allocation, founders should consider:

• Each shareholder’s capital and labor contributions
  
• The company’s future growth plans and strategic direction
  
• Potential investor involvement and its impact on decision-making
  
• Team trust and decision-making efficiency
  

By documenting agreements and rules in a shareholder agreement from the start, companies can enhance collaboration, provide clarity for future financing or equity adjustments, and establish a strong foundation for expansion.