Creating a Solid Shareholder Agreement

Business partnerships can generate billions of dollars. Just consider the stories of the four Warner brothers who launched entertainment company Warner Bros. Or Bill Hewlett and David Packard, who started computer giant Hewlett Packard.

Generally half of all partnerships go south at some point, often leading to costly litigation. Take Eduardo Saverin and Mark Zuckerberg, who created the original version of Facebook before they parted ways and Zuckerberg took the lead. Their falling out is famously dramatized in the movie “The Social Network.”

Partnerships break up for many reasons. People, each bring their own expectations and needs to the table. And when a business grows, and money is on the line, tensions can flare.

But there is one way for partners to boost the likelihood that their partnership will stay strong or close gracefully – a thorough shareholder agreement.

What’s a shareholder agreement?

A shareholder agreement for corporations, like a partnership or operating agreement for LLCs, is a written agreement that lays out vital details about a business venture. When done right, these documents put all nuances on paper and can protect partners when disagreements between them arise.

A shareholder agreement should clarify, at the minimum, the following items:

• How much each partner owns
• What each partners’ voting rights and responsibilities are
• How decisions are made, especially when partners can’t agree on something
• What the specific powers and duties are for each partner
• How profits and losses will be distributed
• What the procedures are for buying out an investor or partner
• What the procedures are for taking on an investor or partners
• In what situations and how the business will be dissolved
• How the business will move forward if one partner dies or becomes disabled

In short, these shareholder agreements spell out exactly how business partners will operate and earn money and lay out procedures to follow when a venture must change or shut down.

Tip 1: Don’t rely on a generic template 

Online shareholder agreements may seem like an easy way to save a little money on attorney’s fees and tick off that box on your to-do list that says, “sign shareholder agreement.” But they can ultimately cost you more in the long run.

Every business has its own individual requirements. The processes and responsibilities laid out in a generic template, for instance, will not fit the needs for most companies and may harm you in the long-run because you will have to turn to whatever applicable state laws there are if your plans are not laid out in the shareholder agreement.

Tip 2: Hire a lawyer

These are tricky discussions that can quickly ramp up and get emotional for those involved. We’re talking about money, after all. A knowledgeable attorney will help take the emotions out of these discussions and keep all parties on track.

An attorney who regularly drafts shareholder agreements for clients also can ensure that business owners don’t forget to address critical issues or gloss over topics that require more thought. What’s more, hiring an attorney now will likely save you tens of thousands of dollars in the future if a hurdle comes up and you are headed to court.

Tip 3: Don’t sign it and forget it

The shareholder agreement should cover every aspect of how a business is governed and ensure partners clearly understand their responsibilities. If, over time, things change – a partner goes in a different direction or the business, for instance, acquires a new entity – it’s time to take another look at the agreement and make amendments to ensure that it represents the company’s current situation. 

When disagreements come up, the shareholder agreement should be the first document partners turn to so they can determine how the dispute should be resolved. If partners are unable to find a solution to a disagreement, the shareholder agreement will help map out the path forward.

Few partners want to contemplate the possibility that a bitter dispute could ultimately destroy all of the hard work they’ve put in to launching a business. A shareholder agreement not only protects a business and its owners from ruin, but also ensures that partners understand their roles and have a plan, if needed, for a graceful exit.

We are not your average law firm. Think of us as the next step in your company’s growth.  When you work with Gouchev Law, you can expect innovative solutions, adept business guidance, and aggressive advocacy to help you achieve your goals and protect you from risks. At Gouchev Law, we help companies of all sizes. Schedule a strategy session today to see what Gouchev Law can do for your business.

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