In my practice, I have assisted many clients in negotiating and drafting their Shareholders Agreements. In this update, I share some insights from my experience.
As long as you are a business owner or an investor, it is a matter of time before you should get a Shareholders Agreement. After all, a Shareholders Agreement settles the ground rules between the different shareholders. The benefits are well-known: A Shareholders Agreement provides confidentiality, a clear structure for business operation, and minimizes uncertainty, for example in the event of future acquisition or fund-raising.
The important analysis
When trying to prepare a Shareholders Agreement, you may be tempted to go through a dictionary-like list of possible clauses to try and understand each of them. Then, you'll find out which ones are in your own interest and prepare the Agreement in that way.
That may not be the best approach. While it is important to understand the implications of each clause to be agreed upon, what is important is that you also understand the context of the agreement. Two simple questions will help you understand the context.
Who are you dealing with?
Different parties have different needs and wants. In the context of a startup raising money, dealing with an angel investor is different from dealing with a venture capitalist. Founders of companies generally do not give board seats to an angel investor because the amounts are smaller and they are not expected to be so involved. However, when dealing with venture capitalists, it will be impossible not to give them board seats, as they are professional investors who want greater scrutiny of the company. Large corporations that are shareholders may also have special requirements. With a greater understanding of the starting point of the various stakeholders, it will be easier for you to negotiate and reach an agreement that is also in your interest.
What will be the respective contributions of the shareholders?
This is essentially an exercise in envisioning the future of the company. In the context of just two business partners going into business together, who is contributing what? How should important decisions be made? What if one of them decides halfway that he wants to quit? If you envision a two-year timeline for the business to stabilize, you may want to consider share vesting, where the business partners only get the full amount of their shares at the end of two years.
If a business partner quits, what is the mechanism for allowing the business to continue? Generally, there'll be a valuation provision to provide for a buyout of the partner's shares. These are just some examples of the benefits of thinking through the future roles of the various shareholders.
An experienced lawyer would guide you in understanding the context, and also present some solutions so that your interests are protected as an agreement is reached.
Understanding the provisions of a Shareholders Agreement
Of course, besides thinking about the context in business terms, an understanding of the various provisions is important in order to negotiate effectively back and forth in a practical manner with the other parties. Your lawyer should also evaluate the provisions and advise you on their implications.
First published October 2, 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
