Deed Of Adherence For New Startup Investors

Yes - if you're bringing a new investor into your startup and you already have a shareholders agreement, a deed of adherence is usually the document that makes them bound by it.

The nuance is that the deed is only one part of the raise. You'll also need to check your shareholders agreement, company constitution, share issue documents, ASIC records and fundraising rules before you update the cap table.

The good news is that this doesn't have to be complicated. A well drafted deed of adherence helps you bring investors in cleanly, without reopening the whole shareholders agreement every time your startup raises capital.

What Is A Deed Of Adherence For A Startup Investor?

A deed of adherence is a short legal document that makes a new investor agree to be bound by your existing shareholders agreement.

You might also hear it called a deed of accession. In Australia, both terms are commonly used for the same basic idea: a new party is acceding to, or joining, an existing agreement.

For a startup, the usual setup looks like this:

• Your company already has a shareholders agreement between the founders and early shareholders.
• A new investor is subscribing for new shares, or buying shares from an existing shareholder.
• Your shareholders agreement says new shareholders must sign a deed of adherence before they're registered as shareholders.
• The new investor signs the deed and agrees to follow the shareholders agreement as if they had signed it from day one.

That last point matters. Your shareholders agreement likely covers things the new investor needs to be bound by, such as:

• Founder and investor rights
• Decision making and reserved matters
• Restrictions on transferring shares
• Confidentiality obligations
• Non-compete or non-solicit clauses, where appropriate and enforceable
• Pre-emptive rights
• Drag-along and tag-along rights
• Exit processes
• Dispute resolution steps

Without the deed, your new investor may hold shares but not be contractually locked into the same rules as everyone else. That can create real friction later, especially if you're raising again, selling the company or dealing with a shareholder exit.

Do I Need A Deed Of Adherence When A New Investor Comes In?

Usually, yes - if your shareholders agreement requires new shareholders to sign one, you should get it signed before issuing or transferring the shares.

Most startup shareholders agreements include a clause saying that a person can't become a shareholder unless they first sign a deed of adherence. This is there to keep the cap table tidy and make sure every shareholder is playing by the same rules.

You may need a deed of adherence when:

• An angel investor subscribes for shares in a seed round
• A strategic investor joins your cap table
• An employee, adviser or contractor receives equity
• A founder transfers some shares to a family trust or holding company
• An existing shareholder sells shares to a new buyer
• You issue shares to investors through a convertible note, SAFE or other advance subscription arrangement

Say you run a SaaS startup in Melbourne. You and your co-founder signed a shareholders agreement when you set up the company. Twelve months later, an angel investor agrees to put in $150,000 for 8% of the company.

The investment amount, valuation and share class might be dealt with in a subscription agreement or share issue letter. But the deed of adherence is what brings that investor into your existing shareholders agreement, so they're bound by transfer restrictions, confidentiality and exit provisions.

If your startup doesn't have a shareholders agreement yet, a deed of adherence won't solve that problem by itself. You'd usually look at putting a shareholders agreement in place first, or as part of the capital raise, so the new investor and existing shareholders sign the right documents together.

How Does A Deed Of Adherence Work With Your Shareholders Agreement?

A deed of adherence works by linking the new investor to the existing shareholders agreement, without needing everyone to sign a fresh full agreement.

This is useful because startup cap tables change. You may raise pre-seed, seed and Series A rounds, issue employee shares, convert SAFEs and add strategic investors. If each change required the entire shareholders agreement to be rewritten, the process would be slow and messy.

A deed keeps things simpler. The new investor signs a short document saying they agree to be bound by the shareholders agreement in the capacity set out in the deed.

Check The Shareholders Agreement First

Before you send a deed to the investor, read the existing shareholders agreement carefully. Look for clauses dealing with:

• Who must sign a deed of adherence
• Whether board or shareholder approval is needed before shares are issued or transferred
• Pre-emptive rights for existing shareholders
• Any investor consent rights or reserved matters
• Whether the new investor gets ordinary shares, preference shares or another class
• Whether the new investor receives specific investor rights
• Whether schedules need to be updated after the issue or transfer

If the shareholders agreement has a form of deed attached as a schedule, it's usually best to start there. But don't assume it's ready to use for every raise. Template deeds often miss practical details, especially if your round involves preference shares, nominee arrangements, trusts, convertible instruments or special investor rights.

Check Your Constitution Too

Your company constitution may also set rules about share issues, transfers, directors and shareholder approvals. If your company doesn't have a constitution, the replaceable rules under the Corporations Act 2001 may apply, unless they have been modified or displaced.

For Australian proprietary companies, you'll also want to keep an eye on the 50 non-employee shareholder limit under the Corporations Act. If your startup is getting close to that number, get advice before bringing in more investors.

Make Sure The Deed Matches The Deal

The deed should match the commercial deal you've agreed. For example, if the investor is receiving preference shares with particular rights, the deed shouldn't simply say they're joining as an ordinary shareholder unless the broader documents clearly deal with that separately.

If there's a mismatch between your subscription agreement, constitution, shareholders agreement and deed of adherence, you may end up with confusion about what the investor actually received and what rights they have.

How Do You Bring A New Investor Onto Your Cap Table?

You bring a new investor onto your cap table by following your approval process, signing the right documents, issuing or transferring the shares, and updating your company records.

The exact process depends on your company documents and the structure of the investment, but a typical capital raise will involve the following steps.

1. Confirm The Investment Terms

First, make sure you have a clear record of the commercial terms and any shareholder loan terms. This might be a term sheet, subscription agreement or share issue letter.

Common terms include:

• How much the investor is investing
• The pre-money or post-money valuation
• The number and class of shares to be issued
• Whether the shares are ordinary or preference shares
• Completion conditions
• Any board seat, observer right or information right
• Whether the investor is investing personally, through a company, through a trust or as a nominee

For more sophisticated rounds, you may also have a shareholders agreement amendment, new constitution, investor rights agreement or disclosure documents.

2. Check Fundraising Rules

Australian companies need to think about the fundraising rules in Chapter 6D of the Corporations Act 2001. In many startup raises, an offer may rely on an exemption from the disclosure requirements, such as offers to certain sophisticated, professional or wholesale investors, or small scale personal offers.

Don't treat this as a box-ticking exercise. If you're raising from multiple people, using online promotion, or offering shares to investors who don't clearly fall within an exemption, get tailored advice before you accept funds.

3. Get The Right Approvals

Your board and shareholders may need to approve the issue or transfer. The approvals could be set by your constitution, shareholders agreement or previous investor documents.

For example, your shareholders agreement might require:

• Board approval for any new share issue
• Investor consent for issuing shares below a certain valuation
• Existing shareholders to waive pre-emptive rights
• Shareholder approval for creating a new share class

Record approvals properly through written resolutions or minutes. This is one of those simple habits that can save you a lot of pain during due diligence later.

4. Have The Investor Sign The Deed Of Adherence

Next, the investor signs the deed of adherence. Ideally, this happens before shares are issued or transferred to them.

If the investor is a company, the deed can usually be signed under section 127 of the Corporations Act. This may involve two directors, a director and company secretary, or, for a proprietary company with a sole director, that sole director if they're also the sole company secretary or the company has no company secretary.

If the investor is an individual, signing requirements for deeds can vary between Australian states and territories, including whether a witness is needed. If an overseas investor is signing, you may need extra care around execution, governing law and counterpart signing.

5. Issue Or Transfer The Shares

Once the documents are signed and funds have cleared, the company issues the shares or registers the transfer.

For a new issue, the company should update its member register, issue share certificates if it uses them, and update the cap table. For a transfer, the company should keep the transfer form and update the register to show the new holder.

6. Update ASIC Where Required

If you're issuing new shares in an Australian company, you'll usually need to lodge an ASIC form to notify the change to share structure and members. The common form for many proprietary company share issues is a Form 484.

ASIC timeframes and forms can change, so check the current ASIC requirements when you complete the raise. The key point is that your internal records and ASIC records should match.

What Should Your Investor Deed Of Adherence Include?

Your investor deed of adherence should clearly identify the investor, the company, the existing shareholders agreement and the capacity in which the investor is joining.

A simple deed often includes:

• Parties: the company, the new investor and sometimes existing shareholders or a founder representative.
• Background: a short explanation that the investor is receiving or acquiring shares and must join the shareholders agreement.
• Reference To The Shareholders Agreement: the date of the agreement and the parties to it.
• Accession Clause: the investor agrees to be bound by the shareholders agreement as if they were an original party.
• Shareholder Capacity: whether the investor is joining as an ordinary shareholder, investor shareholder, founder transferee or another category.
• Representations: basic confirmations, such as authority to sign and power to perform the obligations.
• Confidentiality: if needed, a reminder that the shareholders agreement and company information are confidential.
• Governing Law: the Australian state or territory law that applies.
• Execution Blocks: signing sections that match whether the investor is an individual, company, trustee or other entity.

Some startups also include extra details in the deed, such as the number of shares being issued or the share class. That can be helpful, but make sure it stays consistent with the subscription documents, constitution and member register.

If your investor is investing through a trust, check the trustee details carefully. The shareholder is usually the trustee, not the trust itself. Your cap table should reflect the correct legal holder, often with a note that the shares are held in a trustee capacity.

If your investor is based overseas, you may need to think about practical signing issues, foreign investment considerations, withholding or tax questions, and exchange control or local law issues in the investor's country. A startup lawyer can help with the corporate documents, but tax and foreign law questions should be handled by the right specialists.

What Can Go Wrong If You Skip The Deed?

If you skip the deed, your new investor may not be bound by the shareholders agreement, which can make future decisions and exits much harder.

The risk isn't just theoretical. It can show up in very practical ways.

For example, imagine your Brisbane hardware tech startup raises from a new angel investor. Everyone agrees by email that the investor will get 5% ordinary shares. You issue the shares, update the cap table and move on.

Two years later, a buyer wants to acquire the company. Your shareholders agreement has a drag-along clause, which is designed to let a required majority force all shareholders to sell on the same terms. But the angel investor never signed a deed of adherence and argues they aren't bound by the drag-along clause.

That one missing document can slow down the sale, create negotiation leverage for the investor and make the company look less organised during due diligence.

Other problems can include:

• Transfer Restrictions Not Applying: the investor may argue they can transfer shares without following the agreed process.
• Confidentiality Gaps: sensitive company information may not be protected in the same way.
• Consent Rights Confusion: you may be unsure whether the investor has, or is subject to, certain approval rights.
• Future Raise Delays: new investors may ask you to clean up old cap table issues before they invest.
• Founder Tension: founders and investors may disagree about what was intended at the time of the raise.

You can sometimes fix the issue later by asking the investor to sign a deed after the event. But your bargaining position is usually better before they receive the shares or before completion of the investment.

Key Takeaways

• A deed of adherence is usually how a new startup investor becomes bound by your existing shareholders agreement.
• Check your shareholders agreement and constitution before issuing or transferring shares, as they may set approval steps and signing requirements.
• Your capital raise documents should all line up, including the deed, subscription agreement, constitution, member register and cap table.
• Australian fundraising rules under the Corporations Act 2001 may apply, so check whether an exemption is available before offering shares.
• Get the deed signed before completion where you can, because fixing it later can be awkward and may delay future raises or exits.
• Clean records make your startup easier to diligence, fund and sell when the next opportunity comes along.

If you'd like help with your deed of adherence, shareholders agreement, investor documents or cap table changes, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.