Why should Startups bother with shareholders’ agreements?
My company already has articles of incorporation, so I don’t need a shareholders’ agreement, right?
Shareholders’ agreements are worth their weight in gold. Ask any large company, and chances are, they’d have a shareholders’ agreement. But these agreements are not exclusive to large companies - small businesses reap their benefits too.
Types of Shareholders’ Agreements
In Canada, there are two types of Shareholders’ Agreements:
- General Shareholders’ Agreement (GSA), also known as the SHA; and
- Unanimous Shareholders’ Agreement (USA).
The GSA document outlines the company’s by-laws and the applicable rules that the company operates with and is similar to shareholder agreements in other common law countries.
A USA document is one where the shareholders take over some of the directors’ management powers, obligations and also liabilities. It changes the normal relationship between shareholders (the owners) and directors (who make the decisions about the direction of the business).
Generally, investors are keen not to take on the liabilities of decision making and require a right of veto only on certain key decisions.
These agreements will be modified during the different funding rounds, as each investor adds its own terms, like preference share rights or the right to appoint a director.
Importance of Shareholders’ Agreements for Startups
1. Helps Manage Disputes
When you run a startup, disputes are — unfortunately — common.
Maybe two members of your team don’t agree on the general direction of the company, maybe a founder wants to leave the business and wants to sell their shares, or maybe team members disagree on roles and responsibilities.
A shareholders’ agreement will let you know how to divide assets and responsibilities, who takes on which roles and how to undertake major decisions (for example, would you need a majority vote or a unanimous vote to move forward with an idea).
2. Provides a Structure
Running a small business is uncertain, and uncertainty is stressful.
So, reduce uncertainty.
A Shareholders’ Agreement serves as a handy guide that tells you what to do in best and worst-case scenarios. It’s like having a contingency and risk management plan, combined together.
Besides letting you know what to do in many situations, it also gives you the peace of mind that there is a structure to refer to in case you’re unable to make important decisions under pressure.
3. Reduces Risk
Is it possible that your shareholders might:
- Try to deflect responsibilities and liabilities?
- Try to take the lion’s share of profits?
- Not give your family any income after your die?
- Start a competing firm and poach talent from yours?
Not if you have decent shareholders.
But all these scenarios can quite likely happen if you don’t have a shareholders’ agreement in place. The agreement decides the percentages of profits, losses, assets, and liabilities, creates provisions for the life insurance of shareholders, and establishes non-competing and non-solicitation clauses.
How Can We Help?
Using a generic template Shareholders’ Agreement is one thing.
Drafting effective Shareholders’ Agreements that are fair, consider the laws of the province, and have all the important details you need, is a totally different thing.
So, if you want to create the latter agreements, get in touch with us, and we’ll help make it happen.