Starting a company is an exciting process, but without the appropriate legal foundations, enthusiasm can easily give way to disputes, discord among founders, and even the dissolution of the company. Experience shows that many founding teams in Serbia, focused on product and market, address their legal structure too late — most commonly only when an investor or partner requests access to their documentation. By then, corrective measures without cost and conflict may no longer be possible.
Two documents form the legal backbone of every serious startup: the founding documents (the founding resolution or memorandum of association, and the articles of association in the case of joint-stock companies) and the Shareholders’ Agreement (SHA). Each plays a distinct role, and together they define the rules of the game for all participants.
This article is for informational purposes only and does not substitute for individual legal advice.
Founding Documents: What They Are and What They Regulate
Under the Companies Act (ZPD — Zakon o privrednim društvima), every company must have founding documents that are registered with the Business Registers Agency (APR — Agencija za privredne registre) and become publicly available. For a limited liability company (d.o.o. — društvo sa ograničenom odgovornošću), which is the most common form for startups in Serbia, the founding document — a founding resolution when the company is incorporated by a single person, or a memorandum of association when incorporated by multiple persons — is a mandatory document that must contain:
- the company name, registered seat, and business activities
- details of the founders and their ownership interests
- the amount and structure of the registered capital
- rules on company management and representation
- the decision-making procedure and shareholders’ meeting quorum
For a joint-stock company (a.d. — akcionarsko društvo), which is the more relevant form for startups preparing for venture capital rounds, the articles of association take centre stage and regulate shareholder rights, classes of shares, and governance mechanisms in greater detail.
It is important to understand that the founding document, as a public document, should not contain confidential details of business arrangements between founders — that is the purpose of the SHA.
Shareholders’ Agreement (SHA): The Private Agreement That Protects All Parties
A Shareholders’ Agreement is a private contract between founders and/or investors that governs their mutual relations more deeply than the founding documents alone. Unlike founding documents, the SHA is not deposited with the APR and remains confidential.
A typical SHA for a startup in Serbia should address:
Ownership structure and anti-dilution: Defining the percentage of ownership interests and protection against unwanted dilution in future investment rounds. Provisions such as “weighted average anti-dilution” or “full ratchet” directly affect the value of founders’ interests.
Vesting and cliff: Founders who leave the company before a defined period forfeit part or all of their interests. The standard vesting period in the startup ecosystem is four years with a one-year cliff — this protects the company and the remaining founders against a key team member departing with their full ownership interest.
Right of first refusal: If a founder or investor wishes to sell their interests, the other parties have a priority right to purchase under the same terms. This prevents the entry of unwanted third parties.
Tag-along and drag-along: “Tag-along” is the right of minority shareholders to sell their interests on the same terms as the majority shareholder; “drag-along” is the right of the majority shareholder to compel the minority to sell in the event of an acquisition. Both mechanisms are essential for exits.
Deadlock clause: What happens when founders cannot reach agreement on key decisions? The SHA must provide for resolution mechanisms — ranging from mediation to the “Russian roulette” option (one founder proposes a price, the other chooses whether to buy or sell at that price).
Classes of Shares and Investors’ Preferential Rights
Investors (particularly venture capital funds) almost always require a preferred class of shares (preferred shares) that affords them greater protection than ordinary shareholders (common shares). These preferences typically include:
- Liquidation preference: Investors are paid before founders in the event of a sale or winding-up of the company.
- Veto rights over key decisions: The issuance of new shares, amendments to the articles of association, asset sales, or acquisitions require the consent of preferred shareholders.
- Pro rata participation rights in future rounds: The investor has the right to maintain their proportional ownership position by participating in the next round.
The Serbian Companies Act (ZPD) recognises a multi-class share structure for joint-stock companies, making it possible to create a structure compatible with international standards. For limited liability companies the structure is somewhat simpler, but still flexible through voting rights and profit distribution arrangements in the founding document.
The Most Common Mistakes of Startup Founders
Ignoring a written agreement among co-founders: A verbal agreement carries no legal weight. The sooner roles, vesting, and profit distribution are defined, the less room there is for misunderstanding.
Copying foreign SHA templates without adaptation: American or British SHA templates do not automatically apply under Serbian law. Terms such as “Delaware corporation” or “LLC interests” have no direct equivalent and must be adapted to the Companies Act (ZPD).
Disconnection between the SHA and the founding documents: The provisions of the SHA must not conflict with the founding documents. Where a conflict exists, the public document takes precedence with respect to third parties who rely on the registered information, which can nullify the effect of the private agreement.
Neglecting exit mechanisms: Startup founders often plan their entry but forget about the exit. An SHA without clear exit provisions can become an obstacle in an acquisition.
Adapting Documentation for Investment Rounds
Each new investment round (seed, Series A, B, …) brings the need to revise and supplement the SHA. Investors introduce new terms, and founders must understand what they are agreeing to. The term sheet that precedes the final SHA is a negotiating document — every point in it carries legal and financial consequences.
Particular attention should be paid to:
- Valuation cap and discount on convertible instruments (SAFE — Simple Agreement for Future Equity, or convertible note)
- Duration and terms of the option pool for future employees
- Information rights and reporting obligations to investors
- Non-compete and non-solicitation obligations of founders
Frequently Asked Questions (Q&A)
Must the SHA be in Serbian to be legally valid? The language of the agreement does not in itself affect its validity — under the Law on Obligations (Zakon o obligacionim odnosima), the principles of freedom of contract and informality apply, except where the law prescribes a specific form for certain types of agreements. However, for use in proceedings before a Serbian court, a certified translation into Serbian will be required. It is therefore common practice, particularly with international investors, to create bilingual versions along with a governing language clause in the event of any discrepancy between the translations.
Can the SHA be applied to a limited liability company, or is a joint-stock company required? The SHA can be applied to a limited liability company (d.o.o.) as well — in that case it is typically referred to as a “members’ agreement” or “internal rules.” The founding document of a d.o.o. can be supplemented by this document, which governs the relationships between founders and third parties (angels, pre-seed investors).
What happens if one founder breaches the provisions of the SHA? The SHA provides for sanctions — most commonly penalties, a right of first refusal over the ownership interest at nominal value, or the right to terminate the agreement and claim damages. In extreme cases, judicial or arbitration proceedings may be initiated.
When is the right time to engage a lawyer for founding documents? Before the first external capital is raised or before the first employee who receives equity is brought on board. The earlier clear rules are established, the less costly the correction. Retrospectively structuring relationships after a conflict has arisen is many times more expensive.
Conclusion
Founding documents and the Shareholders’ Agreement are not bureaucratic formalities — they are the legal foundation that determines who actually owns the company, who makes decisions, and what happens in crisis situations. For startups planning growth, attracting investment, and an eventual exit, these documents are the difference between an orderly process and costly litigation.
Sound legal preparation at the outset saves many times more in costs and stress in later stages. By engaging a lawyer with experience in startup law, you ensure that the documentation is compliant with the Serbian Companies Act (ZPD) and at the same time compatible with international investor standards.
Schedule a consultation with the VertexLaw team and lay solid legal foundations for the growth of your startup.
Sources: – https://www.apr.gov.rs/registri/privredna-drustva/registracija.105.html – https://www.paragraf.rs/propisi/zakon_o_privrednim_drustvima.html – https://www.pravno-informacioni-sistem.rs/fp/search?dpid=92
