Why you need a shareholders' agreement when starting your business
It's common for entrepreneurs to go into business without planning contingencies for the future. Being driven and enthusiastic in your mindset is a positive way to start a new business endeavour, but untempered optimism can be problematic when you're planning for the long term. A shareholders' agreement is essential for anyone that is about to enter into business together, regardless of how well they may know one another. Here is a brief overview of the reasons why this is such an important first step.
The basics of a shareholders' agreement
A shareholders' agreement is simply a legal contract that all shareholders sign in order to establish the rules of their business relationship. The details that it contains include the identities of the shareholders, the extent of power that each member has, the contingencies if someone wishes to leave the company or if a member dies, and the details of the board of directors. These are the essential points that it is imperative to establish from the outset, but the agreement will also contain other important information, such as how many members have to agree in order to make certain important decisions.
Why is it essential?
Anyone who is experienced in business knows that it's best to ask the difficult questions early on in a business relationship, rather than have to wrestle over them later. In order to ensure your business is a success, you should be planning for the long term, and that means preparing for any eventuality. A legal contract should safeguard any shareholder from being unfairly treated, and in turn, prevent an individual shareholder from exploiting the business relationship to their gain.
Important issues, such as what a member is entitled to if they choose to leave, or what happens in the event of a personal bankruptcy, need to be laid out from the beginning of the business relationship to minimise the potential damage they could cause. This arrangement means you can be more confident in the stability of your business, and know where you stand at all times with your business partners. Ultimately, it means better business practices all round, and that's not something any start-up should overlook.
The process of the agreement
Setting up a shareholders' agreement is straightforward, but should be done with the help of a legal professional. Having an agreement drafted for you means that you're much less likely to miss anything, and means that you can focus on getting started and making your business a success.
Saving costs by not having a shareholders agreement is a false economy. The risk of damaging disputes is greatly reduced and the cost of resolving them will be considerably less or avoided altogether as we can testify from acting in such disputes.