Creating the right shareholders agreement for a company isn’t straightforward. No two agreements are exactly the same. Understandably, some boot strapping startups will try to save money by creating their own shareholders agreement using a template, but this can be a false economy. Every business is different and is exposed to a different set of risks, so it’s important to have a bespoke agreement developed and put in place from the outset.
Every shareholders agreement needs to be developed according to the needs of the company and its shareholders and neglecting to put one in place can have seriously damaging consequences for the business.
If you are in need of legal advice for a Shareholders Agreement book a free introductory call.
Here we look at what needs to be considered when creating a shareholders agreement for a scale-up business.
What is a shareholder agreement?
The purpose of the shareholders agreement is to regulate the relationship between shareholders and how they deal with the company. It is a private contract entered into by the shareholders of a company that stipulates the rules, responsibilities, decision-making rights and obligations of all parties, including exit and dissolution clauses.
These are all important considerations that fall outside the remit of company’s articles of association and deal with matters such as the management of the company and whether any decisions are controlled by the founders or investors , finance, the issuing and transfer of shares, confidentiality and restrictive covenants to protect the business from shareholders who leaver.
Unlike the company’s articles of association, the shareholders agreement is a private contract. Crafting a legally binding shareholders agreement is not a simple and demands the attention of corporate lawyer.
Why a business needs a shareholder agreement
By creating a shareholders agreement, you take care of possible scenarios should problems occur down the line, so it’s obvious how important that is for a start-up moving into the next stage of the business lifecycle.
Some of the questions you may need to ask include:
- What happens if a founder leaves or becomes unable to carry out duties relating to the business?
- Should there be rules in place if a founder decides to start similar business, perhaps in competition with the company?
- What processes should be in place if a shareholder isn’t delivering on their commitment to the company?
Types of shareholders agreements
Where the business is in its lifecycle and its plans for the future will impact on the type of shareholders agreement you put in place.
Founders shareholder agreement – Put in place prior to the formation of a company.
Investment shareholders agreement – Often named “investment agreements”, these are typically a second or third stage shareholders agreement put in place on funding by investors
Joint venture shareholder agreement – Often used when companies are seeking to combine their businesses or work together on a project.
You also have to take into account that the shareholder agreements may need to evolve as the business grows. This may mean modifying the agreement as company needs change.
Get the legalities right for a smooth transition from start-up to scale-up
Moving from start-up to scale-up comes with a big learning curve. With so much to take care of, it can be too easy to neglect the legal side of things, but it’s these that form the foundations of any scale-up and makes sure the business is in good shape to expand.
Fortunately, working with corporate solicitors such as JPP Law who are startup / scale up specialists means that legal support is less thing to worry about. If you need advice on creating a shareholders agreement for your start-up or scale-up, start by booking a free introductory call.
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