Home > Money With Melanie > Business Development
03 / Mar / 2008
Imagine setting up a business and within just two years the company being ahead of targets and headed for greatness.
You have three very smart professional partners and a staff of 55 people. Everything is on track, growth is continuing and the company is regarded as a mover and shaker.
Just over two years into the business one of the partners decides that he wants to go and contemplate his naval on a beach in Bali indefinitely! This in the middle of a major merger that would take the company into the European markets.
The bad news keeps coming. This partner then convinces the CFO to join him in Bali. These two people are absolutely essential for the success of the merger.
So two key people go off to Bali (still with their shareholding) and the merger fails. The company goes backwards for nearly eight months while the fallout is being managed. Partners are distracted and not focusing on the business.
What’s the point of this story?
The partners (all major shareholders) did not have a shareholders agreement in place. They had not sat down and talked through what they personally wanted out of life and out of the business, and they had not written down what their roles and responsibilities were. As a result, expectations varied and the partners did not really know each other.
I’m surprised how many entrepreneurs don’t have a shareholders agreement in place. In my experience, partnership disagreements are a major cause of business failures.
I understand why this happens. The excitement of the start up, the camaraderie between partners, working closely together and the sense of achievement when targets are hit and everything looks rosy.
If ever there is a road paved with good intentions then this is it. Everybody intends to be fair, and they talk about fairness, but it’s just impossible to make it work until you get down to the actual details. It only gains ultimate clarity when it’s in writing – a shareholders agreement.
It gets very awkward. There you are in the excitement of a start up and it just feels bad to be the one to say “let’s get it in writing”. It’s deflating. However, it’s also very important. Swallow hard, breathe deeply and get it in writing.
People and circumstances change.
How would your company be affected if a shareholding founder ended up in the divorce court. Do you know how that would affect your business? What if a founder were hit by a truck? Does his/her shareholding then belong to the spouse? Now there is a spouse with shares and perhaps decision-making power but with no understanding of the business. You can’t assume that the person will be passive. These are real issues and needs to be addressed.
When bringing in a partner, spend a few days nutting out the shareholders agreement. Maybe you won’t agree, maybe the partnership won’t go ahead. If this is the case, it will be a good thing as you obviously have different ideas about how to develop the business. The benefit will be that you all realise this before you go into business together.
Developing a shareholders agreement can be difficult and the outcomes may be unexpected, but these are the very reasons why you should go through the process.
Do your own research. Talk to entrepreneurs and colleagues about the pros and cons of shareholders agreements. Talk to investors.
More good stuff about shareholders agreements
You’ll definitely need to talk to a solicitor to finalise your agreement. It is very risky to do this for yourselves. Just spend the money and get a good solicitor.
Now let’s look at some of the detail that needs to be covered…
The terms of the shareholders agreement should:
An advantage of a shareholders agreement is that investors will feel comfortable with it since they will identify with the key elements in it such as regular board meetings and job specifications. In other words, a shareholders agreement anticipates the needs of investors and will act to your advantage in negotiations with investors. You have a starting point and some ground rules.
A shareholders agreement that includes the items identified above provides a set of rules for operation of the company. Shareholders will know exactly where they stand. It will reduce uncertainty and aggravation. The agreement will minimise court actions against the business. Disputes and possible future difficulties can be settled out of court since the contractual agreement clearly states these matters.
It is important to consider these matters early in your business. It is too late once there is a dispute. It also is important to receive good legal advice. This advice can be expensive. However, it is worth it when you consider the possible profits you will make in the future.
You do not want legal costs and issues to ruin your opportunity. By virtue of human nature, people are unpredictable, especially where money and power are concerned. Protect yourself. Protect your business.
In summary, a shareholders agreement: