Every great business has to start somewhere, but most don’t think about starting with a shareholder agreement. In fact, most business owners don’t think about drafting a shareholder agreement until the first problems arise.
There are real world reasons why that’s a bad idea, and why your startup should have a shareholder agreement in place.
Shareholder agreements help prevent disagreements
Disagreements between owners can be fatal to a business. In fact, around 62 percent of young companies fail simply because of disagreements between the owners.
A well-drafted shareholder agreement will discuss:
- When and how meetings between shareholders can be called
- The way that voting works on any issues
- When and how a shareholder can sell or transfer his or her shares of the company
- How a shareholder can be bought out
- What happens when a shareholder dies
- What happens when a shareholder is facing bankruptcy or divorce
- What happens when a shareholder is unable to make any required capital contributions
It’s much easier to come to an agreement on all of these things when times are good and you’re working well together, as opposed to when you’re already in conflict.
Shareholder agreements also protect against abuses of power
It isn’t unusual for different owners to have different stakes in the business, but that doesn’t make the majority shareholders’ needs more important. The business needs to be run in a way so that it benefits all shareholders fairly, which means that some issues should require unanimous approval.
Your shareholder agreement can hammer out the terms surrounding which issues have to go before the entire group, rather than being left to the direction of the majority stakeholders.
Shareholder agreements force attention on the future
When a company is young and growing rapidly, it’s easy to get caught up in the moment and lose your sense of direction for the future. A shareholder agreement forces everyone in the company to sit down and discuss what they envision for the future. That helps make certain that you are all on the same page and pulling together, which is another great way to avoid disputes.
If you and your partners are struggling to craft a solid shareholder agreement, a business attorney can guide you through the process and help you tailor the agreement to your needs.