Start-ups: Ways to Avoid a Shareholders’ Dispute

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Disputes between shareholders can be extremely expensive, stressful and highly disruptive to businesses.

It is therefore important, when starting out in business, to take all steps that you reasonably can to minimise the changes of falling out with your founders. Obviously, you can’t eliminate the risk of a future dispute, but there are certain basic steps that can be taken to minimise those risks.

By taking the below steps, you can reduce the risks of finding yourself in a shareholders’ dispute. At Darwin Gray, we help businesses put in place the right contracts and policies to protect their business and help them to grow.

1. Choose your business partners very carefully

If you do not know your prospective business partners very well, tread very carefully. Also, going into business with friends can be fraught with difficulty – a person might be a great friend but not necessarily a good business partner! If you have not previously been in business with someone you should try to undertake some basic research or due diligence on them.

2. Ensure that your respective investments are fair

It can be tempting to allot shares to a founder simply based on prospective effort i.e. “sweat equity”. However, if you do not know that much about a person, you might find out further down the line that they simply do not deliver the goods. Once shares are allotted, unless you have agreed specific provisions, it can be very difficult to get them back at a later date, thus potentially leaving you hamstrung in relation to further investment. Consider a vesting schedule so that the founder does not receive all of the shares at the outset, particularly if they are receiving sweat equity and are not actually investing money.

3. Put appropriate contracts in place

It can be tempting, at the outset of a business, to avoid paying out legal costs to put contracts in place, and instead invest the money into developing the business. However, by not addressing basic legal issues at an early stage, you could be storing up trouble for yourself further down the line. A shareholders’ agreement and director’s service contracts are essential basics for a new company.

4. Think about your exit strategy before you start

It is important, before embarking on a new business venture, for the founders to consider what they all want out of it and also to identify their exit strategy. You and your co-founders are likely to have different priorities, both personal and business, and you therefore need to make sure that you are all heading in the same direction.

5. Be clear about management responsibilities

Make sure that all of the founders understand what is expected of them in relation to the management and running of the business – this is simply good business planning. Professionally drafted director’s service contracts will set out what areas of the business each director has responsibility for.

6. Take professional advice

Where appropriate, take professional advice in relation to your business, whether accountancy, tax or legal. By cutting corners, for example downloading templates off the internet, you may create problems in the business which could fuel a future dispute between the shareholders.

7. Consider appointing a chair or non-executive director

By employing a chair or non-executive director you will not only bring valuable business skills into the business but you will also have an independent third party who can hopefully mediate between the parties should any difficulties arise.

In addition to pre-emptive support, we also advise shareholders in relation to disputes between them. If you have an issue that you could like to discuss please contact us for a confidential no-obligation consultation.