Shareholders Agreements: 7 Questions Answered
1. Do I need one?
Unless you are (a) a sole shareholder; (b) imminently closing a funding round; or (c) 100% sure all shareholders are completely aligned and will never, ever, ever fall out, we definitely recommend you put one in place.
2. What is involved in putting one together?
a. Early on, mainly some frank discussions with your fellow founders/shareholders about how the company is to be funded and operated; as well as how ownership may be transferred. b. This necessarily will make you consider aspects which to date you may not have discussed (nobody likes awkward conversations). A good lawyer will guide you through those and prioritise what is relevant to your business.
3. Such as?
a. Companies are involved in allocating capital (human and cash) so addressing those areas: i. Cash – how is it being (i) invested; (ii) returned to shareholders; and (iii) deployed by the business. ii. Human capital (owner managed businesses)- what is expected of each shareholder operationally; what returns they can expect for those efforts; and what happens if someone leaves iii. If the shareholders are not involved in the day to day running of the business, then the shareholders’ agreement will focus more on the corporate governance and sale of the Company’s shares.
4. What is the biggest advantage in of having one in place?
a. Aside from having those frank discussions up front, the shareholders’ agreement really comes into play when someone is either (a) not performing as expected; or (b) wants to leave. Having a binding agreement in place will save a lot of hassle if or when those situations arise.
5. Got it. Sooooo….. templates. You guys use them right?
a. We do indeed and much like most products these are built to be applicable to the majority and then tailored to your specific circumstances. The skill is choosing the right issues to address for each business. Unless you want to make a very complicated agreement, the costs of putting one together are generally pretty low.
6. Ok I am a founder 6 months away from a funding round. What are my main concerns about not having a shareholders agreement in place?
a. A co-founder leaves with no vesting (clawback of shares) having worked on your product and not assigned the IP they created to the company. Said co-founder refuses to sign any documents and remains uncontactable. Your company is now in limbo and investors walk. b. Even before you get to a disaster scenario, not having a conversation about how the company will be run, what if one of you leave and what are each of your expectations for the business will lead to issues down the line (particularly at the end of the year, we have found from experience).
7. Great. Do you guys put these together?
a. We sure do – its why put this lead magnate together. Get in touch below.
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