shareholders agreement

Shareholders Agreement 101: How One Agreement Can Shape Your Business From Day 1 To Exit

Linkilaw Company Law, Founder's Post, Startup Advice & Tips

‘The Only Mistake I Regret,’ Words Uttered From Every Startup Founder That Didn’t Have A Shareholders Agreement

A Shareholders Agreement is your number one partner in the creation, management, and termination of your company. We don’t doubt the potential and strength of your company, but – trust us when we say this – things regularly turn nasty.

Be prepared!

If you have a legally binding Shareholders Agreement then you demonstrate your startup is serious and well-prepared for the future. It will help you get investment funding when you need to pitch investors and provide other benefits as indicated in this article by David Sheridan.

You need one if you’re serious about your startup. Read this post, get informed, and get a Shareholders Agreement drafted as soon as possible.

What Is A Shareholders Agreement?

A Shareholders Agreement is a private contract between the shareholders of a company. Due to the numerous types of companies, Shareholder’s Agreements vary considerably and no two documents are ever the same.

Despite this, they generally share common characteristics.

They usually describe the corporation organisation, the relationship among the shareholders, and their rights and obligations. They also cover the management of the company and distribution of shares amongst shareholders.

They also will contain exit provisions to prevent unpleasant and drawn-out departures.

When To Draft A Shareholders Agreement?

We recommend drafting an agreement as soon as you create your company.

This will allow all the shareholders to understand their expectations within the company. It will help them envision how they see it operating, and how they want to work through and deal with issues that arise.

It’s also a great way to prevent future conflicts, which will probably occur at some point given what’s involved as indicated in this article by Funders and Founders.

Drafting a document at this early stage will be far cheaper than attempting to fix disputes at a later stage. It’s far more mutually beneficial to negotiate its terms while all is amicable. A win-win situation is very rarely possible when the parties are annoyed with the situation or at odds with one another. 

The kind of issues that can arise without this legal documentation in place are well-documented in this article by Rebekah Campbell. She found out the hard way why the proper legal documentation is essential in a startup.

The Provisions Of A Shareholders Agreement

A Shareholders Agreement is a flexible document; it grants you freedom to structure your company as you wish.

a) The corporate organisation

One of the first functions of the Shareholders Agreement is to determine how the company is organised. It sets up the Board composition, confirms how many Directors are appointed, and what their remuneration will be.

It also determines how the company will be managed, how to hire employees, and how to finance the company.

b) Regulating decision-making

The shareholders may not all hold the same number of shares within a company.

Therefore, the majority controls almost all the company decisions. A Shareholders Agreement can include requirements for important decisions to protect the minority shareholders who own fewer than 50% of the shares.

For instance, it will impose unanimity when appointing or removing the director. However, the unanimity has to be used for crucial decisions only, otherwise the good management of your company could be altered.

c) The regulation of the sale of shares in the company

The sale of a shareholder’s shares can cause huge consequences for daily operations. That’s why it is crucial that the Shareholders Agreement controls how the shares are sold and who they can be sold to.

For instance, a provision can require that each time a shareholder desires to sell his shares, he must offer his shares in priority to the remaining shareholders.

Finally, the Shareholders Agreement also has to determine how a shareholder’s death is dealt with and what happens is a shareholder wants to quit the company.

d) The dispute resolution procedure and the termination

In order to prevent conflicts, it is necessary to draft a provision for the resolution of any future disputes between the shareholders.

For example, it can include deadlock provisions or termination provisions. It can explain the procedure to follow in case of bankruptcy or when the shareholders decide to pack up the company.

Overall, there are many things that need to be considered as shown in this article by Dharmesh Shah.

Final Words

The Shareholders Agreement is a vital legal document for your startup.

A company with a solid Shareholders Agreement will be more secure, more streamlined, and far more attractive to future investors.

Entrepreneurs, don’t waste your time: Get that Agreement sorted!

You can get a shareholders agreement created now by clicking the image below.

shareholders agreement

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