why a shareholders agreement is important

5 Top Tips If Starting A Business With Friends And Why A Shareholders Agreement Is Important

Linkilaw Legal Documents

A very familiar founders path is to start a business with friends.  Hell, why not?  You want to work with people you know well, can trust and (hopefully) will enjoy the journey with; but..

Why a shareholder agreement is important? 

Good corporate morale stimulates innovation and creative ideas, leads to happy staff and optimises business productivity (… all of which will ultimately increase the chance of profitable growth and more importantly at start up level, the chance of surviving!).

Whilst you all have a passion to make your start-up work, starting a business with friends is not a decision which should be taken lightly and there are a few things to consider. In this post, we’ll be revealing what they are and elaborating on why a shareholders agreement is important in this kind of business relationship.

Here Are 5 Top Tips To Consider When Starting A Business With Friends:

1. Roles

It’s a good idea to work out your roles and responsibilities from the start. You instinctively understand each other and know what each of you bring to the table. For example, one of you may be a networker and a deal-maker, another may have strategic vision and can see the “big picture” and another may be methodical, highly organised and a safe pair of hands. Work out who is doing what from the outset. Your roles may change as your business grows – start-ups especially need to be fluid in their approach – but establishing defined roles is one of the lynchpins of a successful business strategy.

2. Networking

How are you going to expand your network? Starting a business with Friends tend to know the same people so you need to think about alternative ways to infiltrate your target market. What kind of external events could you participate in? Are certain individuals more natural at client-facing roles than others? Is there someone in your start-up who would be well placed in building investor relations? What about your digital strategy – do you have someone with the technological know-how to penetrate across multi-media channels?

3. Communication

Clear, scheduled and honest communication is crucial to successfully doing business with friends. You need to establish rules about communication and you need to accept that you won’t necessarily agree on everything. Everyone’s perspective is different and work ethics vary even among the best of friends. Bad decisions lead to failed businesses and this can destroy friendships. It is all about achieving a balance and a level of respect for each other. But if you don’t communicate this from the start, it can easily go the other way.

4. Stability

If your friend is going through an acrimonious divorce then now may not be the time to start a business with friends together! Similarly, at a time when your credibility is being scrutinised by potential investors, do you really want to commit to a start-up if you know that your friend is hopeless with money and currently in a dire financial situation? Severe personal hardship will inevitably spill over into your professional relationship.

5. Legals

Just because you are going into business with your friends does not mean that you won’t fight. Good friendships can still irrevocably break down and the disputes will be made much worse if, “because we’re mates”, you decided not to formalise the relationship properly.    It’s crucial to make sure you get some basic documentation in place to avoid any future ambiguities if (and it does happen) things don’t work out so well.  That way you have the added comfort of knowing that you have formalised your business relationship in black and white.

The worst thing you can do is to start a business just because you think it will be a good laugh to do business with friends. Start a business because you are passionate in your shared dream, because you are driven to make it work and because you genuinely believe that your combined skills matrix will give you a competitive edge; and get it properly formalised with appropriate agreements.

To help you with this considerations, we have created Spliquity, our Startup Equity Calculator, an unbiased tech tool to calculate equity split between co-founders.

At the end, it provides a transparent breakdown of your suggested equity split, allowing co-founders to compare results and start an honest dialogue. Once you’ve discussed this, you can bring a bullet-point arrangement to your lawyer that will be a great base for drafting ypur shareholder’s agreement. 

The result will be a stronger foundation of trust with your co-founders, leading to a more successful working relationship.

If you need legal legal advice for your business, book a call with our legal team and we’ll guide you through every stage of your legal needs. 

why a shareholders agreement is important