Starting a new business can be an exciting time filled with possibilities and potential, especially if you’ll be partnering with others! It’s important to understand the potential challenges that may arise in partnerships and how to go about resolving them. One of the key ways to prepare for these challenges is by creating a shareholders agreement. By taking the time to craft one of these agreements, you can approach your new business venture with the confidence that comes from having a solid legal foundation.
The Basics
At its core, a shareholders agreement is a contract between business partners. This agreement will handle how the business is going to run right from the beginning of setting up your business model.
Taking the time to draw up a shareholders agreement at the start of your business is important. This agreement is instrumental in the running of your business. It outlines the decision-making powers of everyone involved in the ownership of the business. It also includes certain restrictions regarding the sale and transfer of shares and methods of how you’ll go about solving conflicts or disputes with each other.
What Happens If Things Go South?
It’s easy to be hopeful and excited when starting a new business as you may feel that everything will always be smooth sailing regarding you and your business partners. While it’s great to keep this enthusiasm and excitement surrounding your new business journey, it’s important to be realistic and know that conflicts are bound to happen.
Having a shareholders agreement in place will give you some peace of mind that you’ll be able to navigate these conflicts and resolve them more smoothly when they do arise. Since you and your business partners will have already agreed upon the methods for resolving conflicts when the agreement was finalized, everyone should feel like they are being treated fairly when it comes to resolving a dispute.
Transferring Shares to New Owners
Oftentimes, disputes among business partners can arise when there are new or removed members from the team resulting in the transferring of shares to new owners.
A shareholders agreement will usually set up restrictions regarding the transfer of shares. These restrictions will vary depending on your specific business model and situation but they can include things like requiring all other shareholders to agree before anyone can sell their share or making it a requirement that all existing shareholders will get first dibs on buying any shares that someone is looking to sell/transfer.
If everyone had free reign on who they were able to transfer shares to, there would be a strong possibility that your company and everyone who works with you would experience some chaos, issues, or long-standing effects.
At the end of the day, it’s a good idea to plan ahead for these possible occurrences as adding or removing a team member can have a huge impact on your company and can often cause unwanted tension, confusion, or negative emotions to arise if things are not handled in a way that was previously agreed upon by all standing members of the team.
Liquidity
When developing a shareholders agreement, it’s also important to include a section regarding “liquidity.” Liquidity can be found in two different forms (event-based and ordinary course).
Event-based liquidity refers to “family law” events, insolvency, disability, termination of employment, death, etc. Whereas ordinary course-based liquidity refers to the shotgun/auction process, rights of first refusal/opportunity, piggyback/tag-along rights, drag-along rights, permitted transfers without consent, etc.
In these cases, it is key to know who is identified as the “buyer” to better understand the taxation of the proceeds in the hands of the “seller.”
Online Templates vs A Lawyer
When deciding how to draw up your shareholder’s agreement, you should find the method that best suits your situation and budget.
If you already have a strong understanding of the inner workings of a shareholders agreement and need a cheaper alternative than working with a lawyer it’s possible that you could find a good online template to work with. When searching for a template, be sure that the source is reliable and from a legitimate provider so that you know you’re going to end up with a solid agreement.
Although having a lawyer draft your agreement will be more expensive than an online template, they are usually the best option if you have never set up a shareholders agreement before. Understanding the legal language within the contract can be challenging for someone who hasn’t gone through the process and having a lawyer draft this and take you through it in plain language is ideal. Your lawyer can also help you decide on the best practices to include in the agreement for each scenario you may face!
In either case, we recommend having a legal professional review the final version of your agreement if your budget allows, ensuring that the interests of all parties are protected.
When deciding on what to include in your shareholder’s agreement, the most important thing is understanding your business and the people that you’ll be working with, in order to create an agreement that best suits your situation. Whether it’s figuring out what will happen in regards to the transferring of shares, or even just how you will go about handling conflicts between team members, a shareholders agreement will give you a deeper understanding of the workings of your business and allow you to make decisions with greater peace of mind.