As a start-up you want to minimise expenditure and maximise funds. However, investing in a few key legal areas, such as regulating the relationship between the founders is of utmost importance.
No one goes into a business with the intent of falling out with their co-founders or other investors but unfortunately, business disputes, are all too common and can be extremely acrimonious, regardless of whether it is your founding business partners, friends or family members that have invested in your start-up.
It is natural for there to be disagreements on important business decisions, one of you may want to take your money out and move on to a new venture, or maybe the business has not been as successful as envisaged and you are trying to find a way of getting your money back. However, what happens if these agreements become belligerent?
Why a shareholders’ agreement?
Not only can these disputes lead to expensive legal action, but they are also highly disruptive to the ongoing business.
Therefore, a shareholders’ agreement will allow you to minimise that risk as it helps you address key issues at an early stage and will act to regulate the relationship between your fellow shareholders as the business grows.
In addition to regulating day to day management issues, a shareholders’ agreement can be used to address more fundamental points for example, what do you and your fellow shareholders want out of the business or out of your investment? You are likely to have different priorities, both personal and business, and therefore need to make sure that you are all heading in the same direction by identifying and agreeing on how you will manage respective exit strategies should the need arise.
A shareholders’ agreement will also help you to address the following issues:
- What happens in the event of a disagreement – how will the dispute be resolved if you end up in a deadlock?
- Should all shareholders be entitled to be appointed as a director or do you only gain that right on having a set percentage of shares?
- Should there be any obligations or restrictions on what each shareholder can and cannot do, both whilst they are a shareholder and afterwards?
- What entitlement does each shareholder have to any new shares that are issued?
- Should dividends be paid, or the profits reinvested? If they are to be paid, should each shareholder be entitled to the same amount?
- What happens if one of you wants to sell your shares or otherwise transfer your shares to a third party?
Discussing, agreeing upon, and recording these decisions initially, in the form of a shareholders’ agreement, would minimise the risk of a future fall-out. If the worst should happen and a fall-out is inevitable, the agreement acts as a code for how the disagreement should be dealt with so that the matter can be resolved as promptly and cost-effectively as possible, allowing everyone to move on and allow the business to continue with minimal disruption.
To draft a Shareholder Agreement or for advice on your position as a Shareholder please contact our specialist team here at Onyx Solicitors, on 0121 268 3208 or email us at firstname.lastname@example.org with your query.