Estimated reading time: 2 minutes, 33 seconds

Congratulations – you and a few business partners just launched your new company. The next few months that follow will be a whirlwind of getting your business off the ground from fundraising to purchasing equipment and hiring employees. Too say you’ll be busy is an understatement. But don’t forget – no matter how hectic things are –create a shareholder agreement to protect yourself and your company.

A shareholder’s agreement is an agreement between shareholders that dictate what will happen should a shareholder leave voluntarily or involuntarily, or the company ceases to exist. This essentially protects each individual in the long run. If a shareholder agreement has not been created and an individual decides to leave the company things can get messy.

First things first- before you begin to draft your agreement it’s important that you hire a lawyer that has your best interests at heart. Your lawyer will make sure are not going to be taken advantage of if you ever decide to leave the company or get pushed out by the other shareholders.

While there are many shareholder agreements that you can find on the web, I’d recommend you consult a lawyer even if the agreement is between you and one other person. This isn’t something that you want to rush.

After you speak to a lawyer – the next thing to do to is decide what rules and regulations should be included in the document. What are the voting rights of the shareholders? Do decisions have to be agreed upon unanimously or is a majority agreement sufficient? 

Depending on how many shareholders you have- they all may have different responsibilities within the organization. You will want to include those in the shareholder’s agreement. In the agreement you will want to detail financial obligations, percentages of each shareholders, how to transfer shares, what happens if a shareholder were to die, commitments of each shareholders, and how to handle potential disputes.

In the document you will want to cover any situations you may encounter. For instance, franchising, or purchasing property. Decisions agreed upon now – will make the business run efficiently should these issues occur in the future.

It is also important to outline financing details. For instance, how is your organization going to obtain funds? Can shareholders put some of their capital into the business? What happens if the business should go bankrupt? Are shareholders obligated to pay that debt from their personal assets? These are questions that you will want answered in the shareholder’s agreement.

Finally, you will want some type of exit strategy within the document. This could document what would happen if the business goes bankrupt, if the shareholders get into a dispute or if a shareholder simply wants to leave. Negotiating now will make for a smooth transition should a shareholder leave the company.

Before you sign a shareholder agreement, have your lawyer take one last look at it to make sure your rights are protected in the case that you would like to sell your shares or you are asked to leave.

Last modified on Monday, 03 August 2020
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Danielle Loughnane

Danielle Loughnane earned her B.F.A. in Creative Writing from Emerson College and has currently been working in the data science field since 2015. She is the author of a comic book entitled, “The Superhighs” and wrote a blog from 2011-2015 about working in the restaurant industry called, "Sir I Think You've Had Too Much.” In her spare time she likes reading graphic novels and snuggling with her dogs.

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