Shareholders agreement

Shareholders’ Agreements: Everything You Need To Know

Linkilaw Legal Documents

Shareholders agreements:

A shareholders agreement is a legally binding contract between the shareholders of a company. A shareholders agreement determines the shareholders’ rights, responsibilities, privileges and protections. It can be used to protect investments, it creates a secure relationship among shareholders and maps out the running of a company. With a shareholders agreement there is clarity and certainty as to what can or cannot be done and most decisions are taken by consensus and discussion.

Even though it is not a legal requirement to have a shareholders agreement in place it is strongly advised to do so as it protects the shareholders from any potential conflicts.

Furthermore, a shareholders’ agreement is a private agreement and there is no requirement to file it at companies house. Thus, there is great confidentiality in what is contained in the terms of the shareholders’ agreement.  

However, a shareholders agreement cannot be used in the absence of a partnership agreement according to the Partnership Act 1890.

What a shareholders agreement should usually include:

A shareholders agreement should essentially be the cornerstone of any business venture between founders and partners.

The agreement should identify the rights and interests, alongside the duties of the particular parties that sign the agreement. Typically, a shareholders agreement should include clauses such as these:

  • Who is a shareholder in the company
  • Dilution rights
  • Intellectual property assignment
  • Shareholdings and classes of shares for each shareholder
  • Compulsory transfer of shares in the event of a tragedy
  • Voting powers
  • Dividend policies (startups generally have no dividend policies)
  • Responsibilities
  • Reverse vesting provisions
  • Pre-emptive rights

The results of the terms in a shareholders’ agreement should be these things:

  • Shareholders can retain the right to make certain decisions
  • Sense of direction
  • The issue of shares and equity
  • Flexible dividend policy
  • Shareholder/employee relations
  • Minority shareholder protection
  • Majority shareholder protection
  • Dispute resolutions

How do you terminate a shareholders agreement?

You can terminate a shareholders agreement in one of three ways.

The first way you can terminate a shareholders agreement is by mutual agreement. This is when all of the shareholders decide that they no longer want to comply with the shareholders’ agreement due to various reasons. The reasons can be from dissolving the company, selling their shares in the company or the company itself or it can be deciding to leave the company. In a well-drafted shareholders’ agreement, these provisions should be included.

Secondly, the shareholders’ agreement may automatically be terminated if there has been a breach in the agreement by any of the shareholders. When this occurs the shareholders’ agreement will be terminated unless there are clauses in the agreement that sets out some form of mediation.

Lastly, a shareholders agreement can be terminated if simply one of the shareholders want to leave the company. In this case, there will be certain provisions in the shareholders’ agreement to map out what should happen in this scenario.

 

Conflict between shareholders:

It is inevitable that conflict will arise with shareholders at some point in time in the running of the company. It does matter how well you know your shareholder, whether they are a family member, friend, or business partner it is best to have a shareholders agreement in place that you can refer to when conflict arises in your business relationship.

A lot of successful companies have been known to have shareholders with turbulent relationships. A business relationship whether it is good or bad can have a huge impact on whether a company is going to be successful or not.

A case of how a major company’s founder relationship almost cost the business is Zipcar. The cofounders of Zipcar, Antje Danielson and Robin Chase met because their children went to the same school. They decided to create a business because Danielson had an idea of having a shared car company and Chase had a business degree, therefore their collaboration seemed to be perfect. However, soon after the Zipcar started operating different conflicts started to occur between the co-founders. Chase wanted more shares and power to run the company by herself and Chase was too preoccupied with her main job as a lecturer to dedicate as much time as Chase did to the company. Their co-founder relationship ended in a devastating way. Chase ended up buying Danielson out of the company against her will as she had petitioned the boards the majority vote.

This example shows that getting a shareholders agreement is vital in order to set the right foundation for your company. Often people enter to business with their friends and family. However, it may be better to enter into a co-founder relationship with someone you do not know at all. As you would take extra precautions to protect yourself. You may think that you have a good understanding of who you are entering into business with but the reality is that peoples true colours come out when people are under pressure and you don’t see that until you are in business with someone.

In reality, a co-founder relationship should be looked at as a marriage and it should be prepared for and treated in the same way. Decisions on how to raise your company should be made the same way as how you wish to raise your children, through discussion, compromise and ultimately deciding what is best for the company.

 

Vesting shares:

An important factor of a shareholders agreement is when it comes to vesting shares and equity. This area of the agreement should be dealt with caution and care to create the fairest agreement between the shareholders in accordance to what their responsibilities are within the company and how much they have invested in the company.

Before we dig into the technicalities it is important to have a basic understanding of what is equity and what it means to vest shares. Equity is an asset without the liabilities attached to it. Vesting is a legal term which means to give or earn a right to a present or future payment, asset or benefit. It is most commonly used in reference to retirement plan benefits when an employee gets non-forfeitable rights over employer-provided stock incentives or employer contributions made to the employee’s qualified retirement plan account or pension plan.

The most common equity vesting structure is:

  • Founder terms: 4-year vesting, 1-year cliff, for everyone, including you and your employees.
  • Advisor Terms (0.5 – 2.0%): four or two-year vesting, optional cliff, full acceleration upon exit.

A vesting-share cliff basically allows you to trial a hire without immediately committing to equity. You can agree from the moment of the hire on the equity amount and vesting period. However, if they leave prior to the cliff period, (typically 1-2 years) then they receive no equity.

In 2016, new tax laws were created for share options. Now, you may not have to pay Capital Gains Tax on profits gained after the sale of shares.

If you feel like you need a shareholders’ agreement to secure the relationship between you and shareholders/co-founders Linkilaw has created a unique and substantive shareholders agreement that covers all of the points mentioned in the blog and more. 

 

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“I don’t want to spend an arm and a leg to get this done.” – Luke, Founder and CEO of Happy Clouds LTD

Luke is founder and CEO of Happy Clouds LTD, a cloud service provider for companies of all sizes. He started this business by himself but shortly after took on a co-founder, Lucy. Luke and Lucy have been working together for a year but have yet to set up a shareholders’ agreement.

They have been bootstrapping Happy Clouds’ growth and so have spent the bare minimum. A year on, the business is generating revenue and as the client base grows, Luke and Lucy need to ensure that their business foundations and customers contracts are bulletproof.

Luke and Lucy are fast-paced – they don’t have time to spend explaining their business model to lawyers, they want someone who can quickly understand what they want and run with it. They also don’t want to spend an arm and a leg to get this done.

Luke and Lucy come to Linkilaw. After getting their initial terms of business set out, they realise they also will need another 3 to 4 contracts in the next 12 months.

 

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“We are scaling up but we want to make sure we get everything updated and in place too.” – Liam, Co-Founder of WineToGo

Liam is the co-founder of WineToGo. His business sources wine from a large network of wine producers and helps their customers select the best wines for their taste to get delivered to their homes. He founded his business with 3 co-founders (Lance, Lily and Larry) and has a shareholders’ agreement in place. The four of them met at university and decided to build their marketplace.

Lance and Larry are passionate about wine and have a background of oenology. Lily is a developer; she built the first platform and collaborated with Liam on business-related matters. They all work in a small office in North London.

After 1.5 years in business, WineToGo features a first selection of 20 UK wine providers and developed its activity in London. However, the business requires funding to expand to the UK (especially Manchester and Birmingham).

Liam and his co-founders are looking towards the future and are happy to get legal advice. They have a focus on investment but also want to explore the possibility of needing future contracts. They plan on having more team members in the near future (business development consultants to prospect wine producers and developers). Liam and his co-founders want to know what to expect and they should have in place for their growing company.

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“My businesses are successful and I want legal services in the long term” – Lynn, Founder of ConsciousDressToImpress.com.

Lynn is a serial entrepreneur who has founded 6 businesses and successfully exited 3 of them. Her sixth and last business is a sustainable fashion brand that retails exclusively online on her website, ConsciousDressToImpress.com.

Lynn is currently generating a stable £4 million a year of revenue and makes between £750,000 and £950,000 of net profit yearly. She really loves being able to bring sustainability and awareness to one of the most polluting and wasteful industries on the market, and now wants to stop building businesses to just focus on this one.

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Lynn has used Linkilaw previously in her other businesses and loved the work they did for her. It was made easy, accessible, and affordable. She loves being a Linkilaw member because she feels the Linkilaw team is focused on the long-term and on maintaining an honest, professional and friendly relationship with her and her business. Amelie, her dedicated legal point of contact is also a fan of sustainable fashion and loves wearing ConsciousDressToImpress.

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“I want a check-up on my contracts and make sure everything is in place.” – Logan, Founder of InvestMap App

Logan created the InvestMap App 5 years ago with one of his long-term colleagues, Lauren. InvestMap is the tool for people who never invested and want to start. Via the app, the consumer learns about how to make wise and long-term beneficial choices; is invited to invest at the right time, and gets updated on the next gold mine. 

Logan and Lauren already have a few consultants and their app has been adopted increasingly that it’s now difficult for them to manage their activity with their original team. They now want to implement more structure into InvestMap in order to get more staff and be able to get to the next level.

Logan comes to Linkilaw and expects to review the first contracts that have been drafted when he started his business and get more for his new coming employees. He is very keen on ticking boxes and making sure that InvestMap is secure as it goes on.

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“At this stage, Move.In will need legal counsel.” – Leah, Founder and CEO of Move.In

It’s been 8 years since Leah created Move.In, selling kits for students moving to another city (including cutlery, first food, sanitary and emergency essentials). Leah started on her own the business but hired 41 employees during these couple of years. She has now 30 employees and operated over the United Kingdom, Germany and France.

With long-term partner contracts who feed her a stable stream of leads, Move.In has established itself as a leader in the market and currently generates over £3 million of yearly revenue. Its growth is also steady (5-10% a month).

Leah is looking for a legal advisor who will take on the role of in-house legal counsel, but without working full-time. She wants to work with someone who knows and understands her business and proposes the most commercially minded decisions. She doesn’t have the budget for full-time legal counsel, but would nevertheless like to have a lawyer she can reach whenever she wants.

Leah was looking for someone who had expertise in both commercial contracts – ensuring she created real win-win situations in her partnerships – and employment – managing employee onboarding documents such as offer letters, employment and option agreements, staff handbook. Leah now works with a dedicated Linkilaw lawyer and is delighted that she is able to work with a senior lawyer at a rate that is significantly under her budget.

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“I want to get legal work sorted with a moderate budget.” – Lara, App developer

Lara is an app developer who created custom mobile applications for startups. She often works from her clients’ offices to get immediate feedback on her work. When she’s not working from a client’s office, she works from a co-working space or from a local cafe. Her accountant recently told her she should create a business entity for tax and liability purposes.

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Lara loves working with Linkilaw because her dedicated legal point of contact, Gillian, is knowledgeable, responsive and friendly. She likes that Gillian knows and understands her business and long-term goals. The legal solutions Lara receives from Linkilaw are not only accurate, but they are also commercially-minded and thoroughly thought through.

Lara is grateful to have been introduced to Linkilaw by a friend and she now recommends the Linkilaw membership to her clients.

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