More good stuff about shareholders agreements

We all need to know exactly where we stand, and every business will benefit from some clear boundaries. Here’s what to delineate… Here’s the rest of the tips for your shareholders agreement. If you are not yet convinced that you need an agreement go back to my previous blogs about business implosions.

You’ll definitely need to talk to a solicitor to finalise your agreement. It is very risky to do this for yourselves. Just spend the money and get a good solicitor. In fact, much of the information that I’ve put in these blogs about shareholders agreements came from my solicitor’s talks at our workshops.

Now let’s look at some of the detail that needs to be covered…

The terms of the shareholders agreement should:

State the opportunity that is the reason for the company’s being. This determines the commercial areas in which the company will operate. All commercial activity in relation to that opportunity is to be operated through the company. By stating the scope of the company’s operations, it also allows shareholders to operate as individuals in areas not defined as part of the business.
State the future directions and development of the business in terms of its operation and performance. This part of the agreement minimises disputes when individual’s expectations of the direction and performance of the company are not met.
State the rights of the shareholders so that there is a clear definition between ownership, management and control. You do not want minor shareholders telling you how to operate the business, or taking the business to court if their expectations are not met. The operation of the business is a task for the management team.
State how the company will be administered and how decisions will be made. It will include such matters as initial investment, further investment, dividend policy, decision policy, voting policy, management and organisation, appointment and removal of directors, meetings and chairmanship.
Define the tasks and obligations of the individuals involved. If an individual is not contributing in accordance with the agreement then he/she is obliged to sell his/her shares to the remaining shareholders at an agreed value. Each team member has been selected on the basis of what he/she has to offer to the project. If they are not contributing enough in this area, company profits will suffer. Investors may want an increased shareholding if the company does not meet projected performance measures.
State the method of valuation and transfer of shares if a shareholder wants to leave or is obliged to go, or if an investor wants to join or leave.
Allow the business to own the intellectual property including further developments, along with all commercial opportunities associated with it. This situation helps to prevent disenchanted shareholders from leaving the company and using the intellectual property and its associated commercial opportunities to set up in competition with your business.

An advantage of a shareholders agreement is that investors will feel comfortable with it since they will identify with the key elements in it such as regular board meetings and job specifications. In other words, a shareholders agreement anticipates the needs of investors and will act to your advantage in negotiations with investors. You have a starting point and some ground rules.

Key point

A shareholders agreement that includes the items identified above provides a set of rules for operation of the company. Shareholders will know exactly where they stand. It will reduce uncertainty and aggravation. The agreement will minimise court actions against the business. Disputes and possible future difficulties can be settled out of court since the contractual agreement clearly states these matters.

It is important to consider these matters early in your business. It is too late once there is a dispute. It also is important to receive good legal advice. This advice can be expensive. However, it is worth it when you consider the possible profits you will make in the future.

You do not want legal costs and issues to ruin your opportunity. By virtue of human nature, people are unpredictable, especially where money and power are concerned. Protect yourself. Protect your business.

In summary, a shareholders agreement:

Lets shareholders know exactly where they stand in relation to all areas of the operation of the business.
Helps your relationship with your colleagues.
Helps to ensure the survival of the business through minimising disputes.
Ensures the company always owns the intellectual property related to the business.

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.