Understanding Shareholders’ Agreements

by | Oct 4, 2021

Ever heard the saying one is lonely and two’s a company? Sharing a business with another party can be an exciting journey, but you need to make sure that you have a robust shareholders’ agreement that lays down everyone’s obligations to ensure that you don’t have any dramas along the way.

Having worked in the legal field for the last decade, Suraj Rana, the founder of Sole Legal highlights the importance of having a solid shareholders’ agreement from the get-go, especially when you’re a small business.

What’s a Shareholders’ Agreement and when is it necessary?

A shareholder’s agreement (only necessary when you have 2 or more founders), documents the agreed obligations of the company owners. This agreement is ideal for a limited company that is looking to grow in the future. A shareholders’ agreement will build concrete foundations for such expansion by documenting shares, obligations, financials, and exit options. On top of this, the company owners will be able to refer to the agreement when looking at pre-emption rights, leavers, and drag-along clauses as well as share sales or future employee rights.

Need to incorporate these clauses, get some guidance, or simply receive a refresher on what all this means? Get in touch for a quick chat and we can clear some of this up for you.

I am setting up a business with a friend. We don’t need an agreement…right?

Yes, you do! Especially if you are thinking of growing and moving your business forward. As above, being shareholders without an agreement can put you at a disadvantage and slow down your growth or put it at risk. During funding rounds, investors will want to see the existing agreement and as the company grows and operations increase, the agreement will help you remember who oversees what. It is about giving and taking responsibility.

When you’re at the beginning of your business journey, it may be difficult to imagine it being any other way. No doubt you don’t want to see your friend in court over the business, but, if push comes to shove, a safety net in the form of a shareholders’ agreement will be business (and friendship) saving.

Why would I instruct a legal professional if I can DIY it?

It usually comes down to guidance and advice which will come with instructing a professional. You don’t want to miss anything, and DIY documents will be generic.

There are also usual traps that come with DIY documents including option clauses. Such clauses will include the or/if’s and require you to understand the used legal language and delete appropriate parts. Most business owners forget, miss, or simply don’t understand option clauses and leave them as they are which makes the agreement void. These are not the right foundations for your business, so make sure you invest in your legalities before it is too late.

I may need extra guidance on this… what should I do?

If you are not sure what to do next, then we have a couple of options.

Ask yourself:

  • Does your company have more than one founder?
  • Do you want to expand your company?
  • Will you be raising funds in the future?

If you answered yes to any of the above, then you will need a shareholders’ agreement. Purchase one here or set up an initial consultation to discuss your options.

Alternatively, you can have a look at the existing guidance package or email hello@legaldrop.com, the team at LegalDrop is always happy to hear from you.

contributed by Suraj Rana, Sole Legal

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