When you set up a business there is quite rightly a lot of optimism around.
Everyone involved is focused on the business concept and are naturally thinking of the upsides rather than who owns what, and the practicalities of how upcoming decisions will be made.
Also a start up business will frequently involve friends or colleagues where the assumption naturally is that as those involved know each other, and are good people, everyone can trust one another.
Consequently the founders more often than not opt for a handshake, or a verbal agreement about how the business will be run.
While such agreements can be legally binding, they are inherently ambiguous as memories fade and the rapid pace of events overtakes clear thinking.
The best practice message therefore is, and has always been, clear and simple – get it in writing!
Shareholders Agreement – Get It In Writing!
When you have two or more people involved in a business, a shareholders agreement will help make it clear where everyone stands. From the outset you all need to consider and document key items including:
- What happens if someone who owns part of the company (i.e. owns equity) wants to leave?
- How do you exclude people if things don’t work out?
- What happens if someone gets ill?
These are not always the easiest conversations to have but writing down what’s agreed will make sure everyone is on the same page and help with what expert legal commentators have termed ‘legal health promotion’ – basic legal steps that enable problems and disputes to be avoided rather than dealt with, often at a high cost, later on.
It is natural for people to want to avoid disputes rather than deal with them when they arise, and simply by creating a shareholders agreement at the outset, small, cost conscious, early stage businesses, can have an insurance policy to protect everyone against unforeseen things that may come up in the future.
The intention, and hope, is of course that the shareholders agreement remains on the shelf gathering dust and everyone will remain 100% committed throughout and will always agree on the direction of the company and what each person’s role is.
However it must also make sense, particularly when everyone is on good terms at the outset and so likely to be fair, to agree a back up decision making framework which will enable you to deal with any issues that may arise.
Remember you don’t know which side of the negotiating table you may be sitting on. It might be you who wants to do something else or it might be you who is feeling abandoned a few months in.
You Can Write Your Own Shareholders Agreement!
In its simplest form, a shareholders agreement should explain the company idea, the founders’ positions or roles, and details about their ownership stakes.
Although speed is often of the essence in start up businesses, you can save yourself a lot of time and hassle further down the line if you take a few moments early on to discuss expectations and get those commitments in writing.
After all it’s not often you can write the terms of your own insurance policy!
Before You Go …
Check out our YouTube video where we run through a checklist of what a shareholders agreement should contain
Remember the information and products on this website do not constitute legal advice. If in doubt always seek professional advice.
