how a shareholders agreement will work for you

It’s Rude Not To Share: How A Shareholders Agreement Will Work For You

Linkilaw Startup Advice & Tips

It’s Rude Not To Share: How A Shareholders Agreement Will Work For You

Starting a business is hard. Even harder when you go it alone. In fact, businesses that had more than one founder outperformed solo founders by 163%. Why is this?

A Balance Of Skill

It is impossible to be great at everything. When you start a business, you need a team with a breadth of skills to make sure that whatever arises can be dealt with by an experienced individual. This could be anything from marketing to accounts, coding to website designing to talking to clients.

The list is potentially endless depending on what type of business you’re looking to create. To bring most experienced and wide-ranging individuals on board, prepare to shell out some equity.

Distribution Of Work And Success Or Failings

If you’re by yourself as the sole leader of a new business prepare to work all hours and not see your family for years. If anything goes wrong, you will have to bear the brunt of the losses. You can say goodbye to the holidays or the vacations on your bucket list. Just a warning.

On the flipside, by taking on a founder you can divide up the work equally, be home in time for tea or to meet your friends for a drink in your favourite pub. Also if anything goes up in smoke, you can equally cover the losses. It doesn’t sting you as much to share profits as it does to count your losses alone.

Problem Solving Cannot Be One-Sided

When you start a business you know that problems are going to come up. The issue is that you’re going to need the perspective of another person who understands and cares for your business like you do. This individual can only be a co-founder. It’s equally as important that you have an opposing view. Hiring another you is not going to challenge your views and help your business grow.

Advisors Are Not Partners

With an advisor, you cannot call them at midnight to tell them about your ‘Eureka!’ moment. You can do this with a partner, and you can expect calls from them about the ‘Eureka!’ moment they had.

Although it may increase your chances of success, getting a Shareholder on board can be dangerous.

Now that you’ve decided to bring on a co-founder, you may forget that you need to to apply prevention measures to solve complicated situations that could occur. You can do this by regulating your relationship with your co-founder, or investor, by getting a Shareholders’ Agreement drafted.

Now we’re going to explain what it is and how a shareholders agreement will work for you.

What Is A Shareholders Agreement?

This is a private contract signed voluntarily among all shareholders of a company with the aim of regulating their relationships, rights, and obligations, as well as the daily operations of the company. It acts as a security blanket in case anything goes awry. You can never be too careful.

The contents of a shareholders’ agreement will depend on what type of business you are planning on building as well as the type of relationship you envisage having with your co-founder.

Why It’s Important And How A Shareholders Agreement Will Work For You

The startup journey is full of twists and turns. The future is unpredictable and in most cases in the first 1-3 years, important changes will happen. A shareholders’ agreement is important because you can use it to foresee certain aspects that can affect negatively the progress or growth of the company.

When you consider this fact, you can see how a shareholders agreement will work for you and how it’s beneficial.

What Are The Risks Of Not Having A Shareholders Agreement?

You need to know everything about how a shareholders agreement will work for you. Let’s start with a little scenario.

Imagine jumping out of a plane at 12,000 feet without a parachute and just a bin bag to keep you company. Not having a shareholders’ agreement would be just like that. You need to think about potential eventualities:

  • What if a founder leaves the company?
  • What if a founder starts a similar project in direct competition with yours?
  • What if you need another founder who impacts the share allocation?
  • What if a founder is not dedicating enough time?
  • What if a founder is not delivering what he/she was supposed to do?
  • What if there are disagreements among the shareholders?
  • What if there’s a deadlock situation?

Ultimately not having a shareholders’ agreement increases the legal uncertainty for both the shareholders and the company itself. So it’s crucial you get one and understand how a shareholders agreement will work for you long-term.

Main Clauses In A Shareholders Agreement: How A Shareholders Agreement Will Work For You

General Clauses:

This part includes the purpose of the document, as well as indicating the previous agreements made between the parties, indicating their roles, the duration of the contract, laws, and the jurisdiction where disputes will be heard.

Operational And Organisational Clauses:

These are clauses that regulate the legal structure of the company, appointment of directors and their limitations, the shareholders’ contributions, the roles and functions of each party, dedication, obligations, and vesting.

Clauses Regarding Shareholders’ Rights And Obligations:

These clauses establish the decision-making process, how the shareholders’ meetings will proceed and how often will take place, how they will vote, and the compensation that the founders or key collaborators will receive.

Protection Clauses:

These clauses include things like founders’ commitments, vesting conditions, non-compete clauses, non disclosure agreements, etc.

Exit Clauses:

These clauses will regulate the economic terms of a future investment in the company or possible exit, drag and tag along clauses, buy out, etc.

Final Words Of Advice: How A Shareholders Agreement Will Work For You

It is firmly recommended to look for expert advice regarding shareholders’ agreements. Everyone involved in the company needs to understand what they are agreeing to, so there are not any misconceptions further down the line. If you don’t understand how a shareholders agreement will work for you and your company, it’s only going to cause problems in the future.

Ultimately, understanding how a shareholders agreement will work for you is beneficial for all parties concerned and will protect you. Click the image below to get a custom shareholders agreement created for you.

shareholders agreement

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