As a start-up you will be looking to minimise expenditure and maximise funds.
However, investing in a few key legal areas, such as regulating the relationship between the founders. Tegen Quinn explores how a shareholders’ agreement, could save you expense and business disruption in the long run.
No one goes into a business with the intention of falling out with their co-founders or other investors but unfortunately business disputes, whether that be with your founding business partners, friends or family members that have invested in your start-up, are all too common and can be extremely acrimonious.
You may disagree on important business decisions, one of you may want to take your money out and move on to a new venture, or maybe the business has not been as successful as envisaged and you are trying to find a way of getting your money back.
Why a shareholders’ agreement?
Not only can these disputes lead to expensive legal action, they are also highly disruptive to the ongoing business.
A shareholders’ agreement will allow you to minimise that risk as it helps you address key issues at an early stage and will act to regulate the relationship between your fellow shareholders as the business grows.
In addition to regulating day to day management issues, a shareholders’ agreement can be used to address more fundamental points such as, what do you and your fellow shareholders want out of the business or out of your investment? You are likely to have different priorities, both personal and business, and therefore need to make sure that you are all heading in the same direction by identifying and agreeing on how you will manage respective exit strategies should the need arise.
A shareholders’ agreement will help you to address the following issues:
- Should there be any obligations or restrictions on what each shareholder can and cannot do, both whilst they are a shareholder and afterwards?
- Should dividends be paid or the profits reinvested? If they are to be paid, should each shareholder be entitled to the same amount?
- What entitlement does each shareholder have to any new shares that are issued?
- What happens if one of you wants to sell your shares or otherwise transfer your shares to a third party?
- Should all shareholders be entitled to be appointed as a director or do you only gain that right on having a set percentage of shares?
- What happens in the event of a disagreement – how will the dispute be resolved if you end up in a dead-lock?
Discussing, agreeing upon and recording these decisions at the outset, in the form of a shareholders’ agreement, should minimise the risk of a fall out further down the line. If the worst should happen and a fall-out is inevitable, the agreement acts as a code for how the disagreement should be dealt with so that the matter can be resolved as swiftly and cost effectively as possible, allowing everyone to move on and business to continue with minimal disruption.