In my time working with start-ups as a lawyer, I have noticed that people often come to me with a great idea or plan to execute. This idea does not include how the business will be structured and more importantly, what will happen if they and their co-founders begin to disagree.
With the hubris of starting a new business, the possibility of conflict between founders seems unlikely and remote. Unfortunately, this is often not the case. There is usually some disagreement on major issues at key decision moments during the business life cycle.
This is why I suggest to my clients to put their understanding in a shareholders agreement. With or without future problems, a shareholders agreement helps founders think about the direction of their business and about practical issues involved with moving their business forward.
Good agreements make good partnerships
A shareholders agreement can deal with many facets of a business: from simple issues such as electing the Board of Directors to more complex and contentious issues like how to discontinue the collaboration between founders. Come up with a solution while you are excited about the business and on good terms with one another because attempting to resolve disputes once they have arisen can be extremely difficult. The last thing you want is to be bogged down by a protracted founder or shareholder dispute.
A shareholders agreement gives comfort to future investors and other people you may have approached. The will see there has been a structure instituted to deal with disputes and that the rights and responsibilities of the various parties involved in the business have been clearly set out.
In these situations, one of two things will happen: 1) the new shareholder or investor will sign on to the existing shareholder agreement or 2) the shareholder agreement will be amended to reflect the desires of that investor. In either case, all parties understand their respective rights and responsibilities with respect to the business.
Some of the most important issues dealt with in a shareholders agreement are:
- What happens if a shareholder wants out? What if they want to sell only some of their shares?
- What happens in the event of a shareholder’s death, disability or divorce?
- How will the corporation be managed? Who is responsible for doing what?
- How are disputes resolved?
- How will the corporation’s finances be managed? How will its value be determined?
- What level of approval is needed for the corporation to do certain things?
While there is a cost associated with putting a shareholders agreement together, it is a wise up-front investment that saves you time and money and prevents crippling disputes. Because a shareholders agreement is one of the fundamental documents, which will govern how your business will function, you should seek the help of a qualified lawyer to help you draft an agreement that will adequately address your businesses’ concerns.