The ‘We’re All Friends Here’ Fallacy: Why Founders Keep Getting It Wrong
Most Founders and Business Partners, at the start of their business venture together will think, “We don’t need a shareholders’ agreement. We trust each other.”
It feels noble. It feels like the right move. It is, in fact, one of the most dangerous mistakes a Founder can make.
The reality is far less romantic. Skipping a shareholders’ agreement to save costs or because co-founders implicitly trust each other is an expensive mistake that many businesses make. But even when Founders take the step to put something in writing, the misunderstandings are just beginning.
Misunderstanding #1: ‘The Constitution Covers Everything’
Many Founders believe that the company’s constitution—the publicly filed document that governs a company—is sufficient to regulate their relationship. This is a fundamental misconception.
A company’s constitution sets out the basic governance framework, but it rarely addresses the nuanced, practical challenges that arise between shareholders, such as share transfer restrictions, deadlock resolution, or exit strategies. Without a separate agreement, you are left relying solely on the Companies Act and the constitution, which offer limited protection in real-world disputes.
Example:
Imagine two co-founders, each holding 50% of the company. They have a fundamental disagreement on whether to accept a lucrative acquisition offer. The constitution doesn’t specify how to break a tie. The company grinds to a halt. Without a deadlock resolution mechanism or a drag along and tag along clause — something almost never found in a standard constitution — the business faces operational paralysis.
Misunderstanding #2: ‘A Template Is Good Enough’
Generic Template
The internet is awash with generic templates. They look professional. They are cheap. They sound legal and right. And they are often the worst possible solution.
Generic templates sourced from other jurisdictions are based on entirely different legal frameworks and are often incompatible with your local Companies Act and contract law. Beyond the jurisdictional mismatch, these templates frequently omit provisions critical to your specific business, whether you are a tech startup with a complex equity structure or a family-owned business with unique succession concerns. Vague or poorly constructed clauses can be rendered unenforceable, leaving shareholders without the protection they believed they had.
Example:
A tech startup in Malaysia downloads a shareholders’ agreement template from a US-based website. When a dispute arises, they discover the template doesn’t align with Malaysian law. The dispute resolution clause references a US court. The agreement is essentially worthless, and the founders are left to navigate the matter under the general law—a costly and unpredictable path.
AI Agreements
With more and more using AI such as ChatGPT, Deepseek etc, for their business needs, there is natural increase in AI drafted agreements. You key in what you want and AI will produce the agreement for you. Easy? Yes. Safe? Far from it. AI will give you what you want, not what you need. Most don’t know what they don’t know – making using AI dangerous.
Example:
Personally reviewed an AI generated agreement that treated both shareholders equally when in actual fact, 1 is the Founder and operator of the business and the other is merely a short term investor. Important provisions to distinguish the shareholders were missing, clear and specific exit provisions for the investor were missing (only generic exit clauses). Thankfully, they have not signed it and agreed to prepare a proper shareholders agreement.
Misunderstanding #3: ‘We’re Friends, We’ll Work It Out’
Perhaps the most pervasive and destructive misunderstanding is the belief that trust and friendship are substitutes for a formal agreement. Disputes don’t happen when everyone is aligned—they happen precisely when circumstances change, and the pressure mounts.
Example:
In a case recounted by a lawyer, two co-founders—best friends—started a successful tech company. They never signed an agreement. One founder decided to leave the country for personal reasons and wanted to cash out his 50% share. The other wanted to reinvest all profits back into the company for growth. The result was a year-long, expensive, and friendship-destroying legal battle that nearly bankrupted the company. A simple agreement at the start would have defined the exit process, the share valuation method, and the payment terms, saving them millions and their friendship.
Misunderstanding #4: ‘We Don’t Need to Think About Exit’
Founders are optimists. They focus on entry, growth, and success, rarely contemplating what happens when someone wants—or needs—to leave. Ignoring exit strategies is a profound misunderstanding of how the business will evolve. Shareholder agreements that do not address exit strategies can cause serious problems when a shareholder wants to sell their shares or leave the company.
Example:
A business owner passes away. A shareholder agreement in place provides the surviving shareholders the right to purchase the deceased’s shares. In one case, the surviving shareholders refused to comply, arguing that no such obligation existed, leading to a court case that could have been avoided with clearer language. A properly drafted agreement would have clearly defined the valuation method and the purchase terms, preventing the dispute from ever reaching a courtroom.
Conclusion: The Real Purpose of the Agreement
A shareholders’ agreement is not a sign of distrust. It is a sign of foresight. It is not a document to be filed away and forgotten; it is a living rulebook that clarifies roles, responsibilities, and decision-making powers, helping to prevent conflicts over financial management and strategic direction.
The best time to negotiate this agreement is when everyone is still friends, the business is full of potential, and the discussions can be open and honest. By the time a dispute erupts, it is often too late. The agreement isn’t about predicting every possible problem—it’s about having a clear, mutually agreed-upon framework for navigating the inevitable bumps in the road.
It is almost always cheaper to draft a comprehensive agreement early than to litigate the consequences of not having one. The agreement demonstrates to investors, partners, and stakeholders that a company is professionally managed and prepared for long-term success.
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