As a small business owner, it’s exciting when you’ve finished all the initial paperwork and your business is finally up and running. But if you co-own your business with partners, you may have one more step to complete: a shareholders agreement. This document, which is an agreement between a company’s owners, sets out the expectations and restrictions for each owner regarding management, selling of shares, and resolving disputes. Even if you haven’t considered the issues before, your business may need a shareholders agreement for several good reasons.
The Shareholders Agreement Road Map
When you start your business, you and your partners may expect smooth sailing going forward. But conflicts are inevitable in business, and shareholder disputes can contribute to the failure of small businesses all too easily. With a shareholder agreement in place, you can proactively decide how you plan to resolve specific issues productively. For example, one purpose of a shareholders agreement is to determine what to do if one of your partners wants to leave. Can one partner buy another out?
To this end, one of the most common shareholders agreement clauses is known as a shotgun clause or a “buy-sell provision.” This simple mechanism provides the structure under which one partner can buy the shares of a partner who wishes to leave the company, with all terms pre-negotiated to prevent disputes. Without a shotgun clause, this type of dispute is may be likely to lead to litigation or even the dissolution of the company.
Co-Founder Disagreements and Minority Shareholders
You and your partners may split your ownership of your company equally, or different owners may own different percentages of the business. If your shareholders’ equity isn’t split evenly among partners, the majority shareholders are in a position to force decisions that the minority shareholders may not agree with. To avoid potential abuse of power in such instances, a shareholders agreement can protect the voice of the minority shareholders. For example, your shareholders agreement may require unanimous shareholder approval for certain decisions or issues.
Among topics that typically require unanimous shareholder approval are:
- Entering into loan agreements
- Electing directors
- Requiring cash contributions from shareholders
Control the Transfer of Shares to New Owners
You and your partners probably have a good understanding of your relationship with each other as you start your company. But over time, as your business grows and you maybe even add new partners, things can change. Removing or adding any team member can have a huge impact on your entire organization. Think about the effect on your business if your partners can transfer their shares freely to anybody they choose. Suddenly, someone whom you don’t know could be making decisions for your company alongside you.
That’s why shareholders agreements often impose restrictions on the transfer of shares. Restrictions usually require all shareholders to agree before any one of them can sell shares. At a minimum, other shareholders should get the first opportunity to buy your shares when you depart.
Customized Business Shareholder Agreements
The best thing about shareholders agreements? You can craft yours to fit your business’s specific needs. Shareholders agreements can include many other provisions if you need them, including:
- Shareholder financing provisions
- Share vesting provisions
- Non-compete clauses for departing shareholders
- Mechanisms for valuing the business
- Provisions dealing with dividends
Relationship Building with Shareholder Partners
The very process of discussing a shareholder agreement benefits your partnership, putting you in a position where the partners are required to have an open and honest dialogue about subjects that might otherwise go unspoken for years. Your team is likely come out feeling stronger thanks to the realization that you’re all on the same path, knowing that if a conflict arises, you’ve already done the hard work to come to a fair and equitable resolution.
Spending time and a minimal amount of money on a well thought-out and carefully drafted shareholders agreement allows you and your team to focus on what you do best: growing your company. When you choose software that helps you keep your finances under control, you also put yourself on the path to growth. 5.6 million customers use QuickBooks. Join them today to help your business thrive for free.