Do I need a Shareholder Agreement?

I'll let you in on a secret - you don't really need to have a shareholder agreement. There is nothing in the law that says you need one. But I can guarantee that as your business grows and gets more complicated, the risk of arguments between owners grows too - and you'll be wishing you had one!

A shareholder agreement actually sets you up for success. The process of writing up an agreement forces each owner to seriously think about how they might tackle challenges with their business partners in the future, and can be a good check of whether everyone is on the same page.

There are plenty of good reasons why you should have a shareholder agreement - below are just a couple of key ones based on my own experiences working with clients.

How do we decide stuff?

Drawing up a shareholders agreement means that all owners have to think about who makes what decisions. A shareholder agreement will split out decisions that can be made by 1. the Directors (responsible for management of the business) and 2. the Shareholders (who own the business). It will also require different majorities of votes for different decisions - a simple majority of 50% or more or a special majority of 75% or more. Business owners will need to decide: for important decisions, do you just need a 50% majority to agree or do you most (75%) or all (100%) owners to agree?

What happens when you simply can't agree on an issue? A shareholder agreement can set out deadlock provisions to get you out of a pickle. For example, you and two business partners can't agree on whether or not you want to take out a loan for the business. Your two partners really want to do it, but you're not so keen - none of you are backing down. A deadlock provision in a shareholder agreement can set out a process - you need to notify the other two that you disagree, and you need to make a genuine effort to resolve the dispute. If the issue still isn't resolved in 60 days, then your other two partners have to buy you out. You exit the business, and your partners go ahead with their loan.

Owners leaving the business

Creating a shareholder agreement a great opportunity for business owners to discuss what happens if someone wants to leave the business. Can they just get someone to buy their piece of the pie or do they have to offer the pie to the other owners first?

A lot of shareholder agreements have a 'first right of refusal' or 'pre-emptive rights' on share transfers. This means that any owner looking to sell its ownership of the business first needs to offer his slice of the pie to the other owners before trying to sell to someone else. The other owners can either accept to buy out owner that wants out, or they can allow an external third party to buy it.

This shit's for real!

Actually investing the time and money to write up a shareholders agreement shows potential investors (and banks) that you are damn serious about the business. It's a way of 'levelling up' the business and making it more concrete in everyone's minds.

Think of this - your business is growing and is crushing it, which peaks the interest of an investor. He thinks your product is awesome, and wants to get in on the action. Showing a potential investor that you’ve already got a framework in place indicates that you’re running a tight ship. An existing shareholder agreement will save owners and new investors time and money when it comes to doing a deal.

Save money

A business spends a tonne of time on product development, business plans, budgets, renting a shop, everything it needs to get set up. Having an agreement between the owners of a business is just as important. I'm willing to bet my hat that the money (and time) you will spend on writing up a shareholders agreement now is a fraction of the cost of a full blown dispute.

What has your experience been to date with shareholder agreements? Do you think you need one?