Benefits of a shareholders agreements early on in the life of a start up

Many people get excited or caught up in the moment when they have grown a business to a size where investment is needed or seed investment is offered at the start of the life cycle of a company. Investment may be made for various reasons such as EIS or SEIS tax benefits or just due to the prospect of an exciting business opportunity.

Investors will want the most beneficial investment terms for themselves and be able to assist in making decisions of the company, blocking those of the founders or even have rights to remove key people. However, founders will want to carry on running the business as they have previously. A shareholders agreement governs these rights and so are usually needed early on in the life of a business when investment is taken. Even though you may think that it is ok to trust the investors; businesses break down when finances are at stake.

It is important to note that the company will be governed by its articles of association, but new companies will usually have standard form articles. Thus, when an investor or partner enters a business, it is best to have a shareholders agreement which ultimately looks at how the business is to be run. This will govern the relationship between those that own equity in a business. This document may not be in place for all shareholders, but may actually apply to a small group of shareholders in a particular class.

The shareholders agreement will outline how important decisions are to be made, the shareholders’ obligations and rights in relation to the company. Importantly, as the company grows and investors look to offload shares, the shareholders agreement will regulate any share sales in the company. At a more fundamental level it will make clear the ways in which the company is going to be run. The agreement will aim to provide security for all levels of shareholder, as it will provide an element of protection for minority shareholders. Without a shareholders agreement, minority shareholders (holding less than 50% of the shares) will have little say in the company, so provisions will be added that make certain decisions to be agreed by all shareholders.

Other important points to mention in the shareholders’ agreement will be in relation to issuing and transferring of shares. This will encompass points in relation to the selling of shares and preventing unwanted shareholders. In relation to the operation of the business, the agreement will cover the appointment of directors, their position and remuneration, the company’s business, possibly any capital expenditure above a certain threshold, provision of information to shareholders and general finances of the company.