You found your corner of the market. You made your dream come true. You built a successful business and you don’t want anything getting in your way. Unfortunately, even the strongest business can be threatened by a shareholder dispute.
Whether you’ve known the shareholder for much of your life or you were two strangers who came together based on this common interest, business is like a marriage: you don’t go into it thinking you’ll eventually move in different directions.
Like a marriage, it’s incredibly important to set yourself up for any possible outcome that may come your way. A shareholder agreement, or stockholder agreement, outlines company ownership, and details the ways in which business will be handled.
Here are five important aspects of a shareholder agreement:
- Number of shares issued and their value. The number of shares and the class of shares is used to determine voting rights and ownership of the company. Without coming to an agreement and carefully documenting this step, shareholder disputes are very likely.
- A right of refusal clause. If a shareholder decides to sell their shares, the business must be provided details and allowed to purchase the shares. This does not happen if it’s not written into the agreement.
- Optional vs mandatory buy back. This outlines the process and procedures if a shareholder leaves the business. In that case, you will have to decide whether buy back of stock is optional or required.
- Governance. An important aspect of a shareholder agreement is how governance is outlined. Without explicitly stating in the shareholders agreement that the shareholders will make the decisions, management may take place at the director level instead.
- Non-Compete. In order to protectyour corner in the market, many shareholder agreements place restrictions on shareholders doing business with competitors.
Just like your home, you should protect your business with locks and alarms. Make the investment in protecting your business with a shareholder agreement so that you can set your mind at ease and get back to the business you love.