The realm of small business ownership is fraught with pitfalls large and small. Among the most common traps small business owners fall into is the failure to ensure that a detailed document laying out the important rights and responsibilities of the business’s members is in place. I have had the pleasure of serving restaurateurs, software professionals, inventors, and various other bright, motivated people who are taking their first steps down the path to success. While they have each had often stunning levels of expertise in their respective fields, a mistake most of these talented people have made over the years is neglecting to draft a shareholder’s agreement.
Though most laypeople generally do not believe that shareholder’s agreements are of any use among friends and family, such an agreement is probably more important in closely-held ventures. All too often the individuals involved in such smaller enterprises greatly overestimate their ability to resolve disagreements without formal, structured guidelines.
Your start-up or small business needs a well-written shareholder’s agreement for several important reasons:
● A well-constructed shareholder’s agreement clearly and thoroughly lays out the rights and responsibilities of each and every member of your company, and it sets out the rules by which your company will operate. Just like every game or sport requires at least a basic meeting of the minds regarding the framework of rules by which the players must abide, a written agreement drafted at the outset of the venture describing the rules by which all actors of your company agree to follow is likely to result in a smoother running operation, potentially saving you and your company significant time, money, and resources that may be spent on resolving agreements in the future.
● A major portion of a well-drafted shareholder’s agreement involves describing who has authority to enter into contracts on the company’s behalf. Though it may start out small, your company is likely to enter into a myriad of agreements with clients, suppliers, subcontractors, financial institutions, and many more individuals and firms, many (if not most) of whom will require a document stating who may sign for the company. The shareholder’s agreement can also be drafted to outline terms for loans that may be made in the future to shareholders, including provisions stating interest rates to be charged and whether dividends can be paid before the loan is repaid.
● Shareholder’s agreements are also a good place to put into writing what kinds of decisions may be made by officers using their own discretion and what sorts of issues must be resolved by a vote of the shareholders. Though it may seem obvious to you that a particular situation ought to be resolved in a democratic fashion via a vote, other participants may have equally compelling reasons why such a decision need only be made by one or two members of your company. A shareholder’s agreement is a golden opportunity to bring those issues to the fore and come to an agreement on who makes the call on a particular issue outside of a high-stakes environment.
● Shareholder’s agreements often delineate the terms by which new shares may be issued in the future. Your company may find itself in need of raising operating capital to fund a new expansion, retire debt, buy equipment, or any number of other reasons. However, issuing new shares has the potential of changing the balance of ownership each participant has in the company. Stockholder’s agreements typically include provisions granting existing shareholders the right to be the first in line to purchase newly-issued stock, giving each participant the opportunity to preserve his or her percentage of ownership in the venture.
Paper It Up – Why Your Small Business Needs a Shareholder’s Agreement
by Taayo Simmonds
25 BLawyerisH/July, 2017