Congratulations! You found some investors for your business and are ready to start a corporation. But it’s not time to pour the champagne yet.
Have you thought about how you’re going to protect your interests in this arrangement? Do you know who is doing what and who has what kind of power? What happens when something goes wrong?
Don’t let these fears cripple your dreams of expansion. The answer is simple: create a shareholder’s agreement.
This essential document will outline all the details of running your new corporation as well as protect you and your investors. Before you begin drafting your shareholder’s agreement, review this guide.
What Is a Shareholder’s Agreement?
A shareholder’s agreement is a legally binding contract that spells out the details of a corporation. It’s sometimes referred to as a stockholders agreement and is different from a company constitution. For more on the differences, learn more here. The stakeholders’ agreement outlines the roles and responsibilities of the stakeholders or investors.
This contract is the first of all the founding documents that need to be drawn up after it. It lays the groundwork for how the relationship between investors and the company will function.
It’s critical that you define this information first because all the rest of the decisions you will need to make depend on it. You don’t want to depend on an implied shareholder agreement, because it will be very unclear how the company will operate. To avoid confusion and disagreement, you will want to have this contract in place.
What Needs to Be Included
There are several key elements to include in your shareholder’s agreement. Follow this checklist to make sure you haven’t missed anything:
- The Basics
- Name and details of Company
- Date of signing
- Shareholders’ legal names and contact information
- Administrative
- Number of directors and their specific responsibilities
- Officer positions
- Number of shares per shareholder
- Financial – capital needed and from who
- Voting
- What percentage of the vote decides an issue
- How Directors and Officers become so
- Defining a Quorum
- Transferring Shares
- If and how shares can transfer from one shareholder to another
- Resignation, expulsion, or death of a shareholder
- Confidentiality
- Other
- Duration
- Dispute resolution
- Policy on dividends
This snapshot provides a basic outline of this contract. Go into as much detail as you can possibly think of in each of these categories. Have meetings with your investors to flush it out. Leave no stone unturned in establishing this critical building block for your corporation.
What to Do Now
Don’t wait another day to get these details down on paper. Start with a draft of your shareholder’s agreement and send it to your investors. Everyone’s opinion matters, but you should always consult a lawyer for documents this important.
The sooner you create your shareholder’s agreement, the sooner you protect yourself and your business can flourish. When you have terms in place with your investors, your company can run smoothly and continue to thrive.
Now that you have all the basics of writing a shareholder’s agreement, what are you waiting for? Take the first step right now.
