Every Founder who starts a business does so to make a profit and be their own boss. There are several structures you can use to run your business but the most common one is a private limited company. One of the central aspects of a limited company is the idea of having shares which determine the ownership and management of the business. This is why it is important to consider a shareholders’ agreement if you wish to retain ownership and maximize the profit you earn from your business.
What is a shareholders’ agreement?
A shareholders’ agreement is a formal written agreement amongst the co-founders of a business that can later include new shareholders as well as investors. It governs the ownership and management of a business in the present and the future. It also outlines the rights and obligations of different shareholders. It comes particularly handy when dealing with new investors in the business as you can assign them shares within your business in exchange for capital.
What are the benefits of having a shareholder’s agreement?
- It gives you control over the business both today and tomorrow
The first time I drafted a shareholder’s agreement was for a client who was keen on getting an investor on board their company but did not want to give too much control over the business away. I helped them navigate the issue by creating a shareholders’ agreement between the two and making sure we gave the investor non-voting shares, what this meant is that although the investor was a shareholder he could not make decisions or vote on any decision in the company.
2. It gives you a way of resolving disputes
Relationships are not always rosy, sometimes there is a conflict and at other times it is time to call it quits. The same applies in business and when the fallout is bitter it is important to have a proper agreed way of resolving disputes. Lawsuits can kill a business in terms of costs and having a shareholders’ agreement allows you to agree with your co-founders to solve the dispute through cheaper alternatives like Mediation.
3. It attracts investors
A well-drafted shareholders’ agreement shows that the business is well-structured, mature, credible, and considerate of its members. A shareholders agreement also provides clarity for future investors to understand the mechanisms, rules, rights, and responsibilities that apply to shareholders and how they are expected to conduct themselves as members of the company. When investors know what to expect it makes it easier for them to consider investing in your company, wouldn’t you?
The writer is a lawyer who specializes in offering legal services to people in technology, you can contact him through firstname.lastname@example.org