‘Keep the team together, work on that common goal’. Easy to say, but sticking to it can be harder. A shareholders agreement can be handy here…
Last week I spelt out how bad stuff can happen if you don’t have a shareholders agreement. This week I’m giving you the good oil on shareholders agreements.
Get daily business news.
The latest stories, funding information, and expert advice. Free to sign up.
Because the success of entrepreneurial businesses is based on the ability of a team rather than an individual, people with different skills, ways of working, resources and interests will be coming together in the entrepreneurial business.
In other words, people with technological skills will be coming together to interact with people who have commercial skills and money. However, there often will be some unwillingness on the part of certain parties to give up any control or potential return as they see their contribution to the business as more important than others.
Conflict often arises in these circumstances. The business needs to be protected against situations that arise out of people putting their own interests first. The shareholders agreement is a document that caters for these needs.
The shareholders agreement should be determined before the business is set up. It is too late to wait until you can “afford” to pay for good advice. The shareholders agreement is a legal agreement that can incorporate all the necessary matters to protect the business.
It should detail the responsibilities of each of the shareholders in relation to the financial and administrative arrangements of the entity and define the rights and obligations of each of the shareholders. A shareholders agreement will address at least the following issues:
- The scope of the company’s operations.
- Contributions of each of the shareholders to the business.
- How the business will be administered.
- Roles of the shareholders in conducting the business.
- How shareholdings will be valued and transferred.
- The intellectual property owned by the entity.
A shareholders agreement addresses those issues that a company’s articles of association (that is, a company’s rules or by-laws) do not address. These issues include ownership (including intellectual property), management and control of the company, and the relationship of shareholders with each other, the company, and its assets.
Terms of the shareholders agreement
The terms of the shareholders agreement are open for negotiation. There are no standard forms or procedures in this area. In fact, this area of law allows for some innovative thinking by those involved.
Each entrepreneurial business has circumstances that are peculiar to it. Therefore, for your protection and everyone else involved, it is best that lawyers are involved in making these agreements. In fact, each party involved should be represented by a separate lawyer. There also should be a lawyer to act for the company. By working in this way, there will be no conflict of interest on the part of any lawyer.
Other professionals that should be involved include an accountant for correct taxation advice and accounting principles, and also a patent attorney to deal with the intellectual property issues.
These professionals should work together so that all the commercial and legal alternatives are considered and that maximum legal protection is provided. The document must be as precise as possible.
That gives you the start of the process. Next week I’ll give you lots more detail about the actual agreements.
Till next week…
Gail Geronimos, is the founder of Achaeus, which helps entrepreneurs develop their businesses and she has just started a new site www.pitchingtoinvestors.com with tools and tips about how to develop killer presentations to raise capital.
To read more Gail Geronimos blogs, click here.