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When setting up a company, especially if family or friends are involved, it is easy to proceed under the assumption that nothing can go wrong in the future, and that no agreement outlining the roles and relationships within a business is needed.
However, if you are going into business and to save future disputes, we greatly recommend putting a shareholders’ agreement in place to protect your business and your own investment in the company.
In this guide, we aim to give you an idea of what a shareholders’ agreement should include and how it can protect you.
The clue is in the name. A shareholders’ agreement is exactly that: an agreement between the shareholders of a company. Its specific purpose is to protect a shareholder’s investment in a company and to establish a relationship between the shareholder and founder in the governing of a company.
While it comes as a surprise to many entrepreneurs, shareholders agreements can include anything a business owner wishes. However, for the purposes of this guide, we will focus on the prescribed elements. Ideally, an agreement should cover the following:
These are the basic areas that an agreement will cover, but of course as an entrepreneur you can include as many clauses as you wish.
While it is certainly not possible to prepare for every eventuality, there are a number of issues that you can prepare for based on instinct or past experiences. Here’s a few issues that you may come across:
While the above are but a few of the common issues you may face as a business founder, as uncomfortable as it may be, it is worth making provisions for other events that occur at then end of a business’s life:
As discussed, a shareholders agreement can technically include anything you like, but there are usually a common set of provisions you would expect in agreement. Below are just a few examples from Envestors:
Ultimately, a shareholders' agreement protects the rights of all shareholders and the value of their shareholding. Without an agreement, majority shareholders may force issues that are not in the minority shareholders’ or indeed the business’s interest.
However, once again it all depends on how the agreement is put together. There can be several classes of shares, for example, that give you certain rights over the company. In theory, you can have one A Class share and own 1% of your business, but have total control if it is worded into the shareholders’ agreement.
The key here is to try to understand where your business is going in the future. What controls you need over it as a shareholder or founder. Either one needs to consider the needs of each other to ensure the business is successful.
There are standard templates available for shareholders agreements. But, you can amend accordingly if you want a more bespoke agreement and seek advice. It is important to remember that you don’t have to be governed by a standard agreement, customise your agreement to suit your business needs.
Authors: Oliver Murphy & Sacha Bright
Disclaimer
To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.
Tagged: entrepreneur sme business
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