James Omond, Mentor

What are the key elements of a shareholder agreement?

StartupSmart /

There are two key elements which should be covered in a shareholder agreement.

 

The first element is entirely within your own hands – it should set out in writing all of the things which you and your fellow business owners and investors have agreed, so that there is no confusion down the track as to what the commitments (and lack of commitments) from each party are.

 

The second set of issues are those which are common to every shareholder agreement – although the details may vary from company to company.

Of these, the main three which you should focus on are:

 

  1. The money – its sources and amounts. What is the maximum commitment which each investor is obliged to make (and description of whether it will be in cash or “in kind” – such as time being invested in the business, intellectual property, etc), and when and how these contributions will be made.

    Also, what happens if someone does not contribute their commitment? Can they be kicked out, or is their equity simply diluted?

  2. The exit strategy – this is probably even more important than financial commitments.

    If someone wants to leave, can they get their money out, and how will the impact on the remaining investors be managed?

    You might want to include a minimum time period before anyone is allowed to get their money out, and if they are allowed to sell, you need to consider whether they can sell to third parties or only to other investors.

    If it is the latter, you may want to have “vendor finance” provisions – so that it does impose a large cash drain on the business by allowing for payment over time.

  3. The decision-making process – the document should set out how the day to day decisions regarding the running of the business are made, and also set out a list of the “big ticket” matters which require either a unanimous decision (or a special majority, say 75%) of the investors and/or directors.

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