The road to startup success is paved with failure. Sometimes it’s outside of your control; wrong market, bad timing, lack of funding, poor leadership, but in my experience, all too often the reason startups meet their demise is due to internal relations. Now, lets picture your start-up. Of course you probably don’t have any money, therefore you don’t need to put all those “implied” agreements that you conveniently rushed through during the excitement of launching your company into writing. Mistake numero uno, my friends. It’s the idea that holds value. Now, I understand your reasoning. You and your founders are good friends, you have a great project together, you get along great, what could go wrong? Well… EVERYTHING!
Hope for the best, but prepare for the worst.
As much as you love your cofounders and early investors, a lot of things are about to change once you go all in and turn an idea into a company. First, you’re going to be spending obscene amounts of time together. Remember that horrible roommate back at uni? The one who left his dirty laundry all over the place and never cleaned the kitchen? Yeah, that was a cakewalk compared to the ways your partners will push your buttons and drive you utterly insane during your startup journey.
Second, you know that amazing idea that you’re working on together? Well, over the next few months and years it’s going to break down, melt into liquid and slide off the computer screen as it morphs into a completely different company than anyone could have imagined. That’s normal, but no one seems to expect it and sometimes the early founders want out when their innovative DVD rental startup pivots into a disruptive tampon machine. That’s when you’re going to be very happy that you took the time to create a shareholders agreement.
Why be surprised and unprepared when the company takes an unexpected turn?
The ultimate goal of any start-up is to create a new company from scratch and be rewarded with unbelievable riches for doing so. All the baby steps that you take in the early stages of your company will set the stage for the future challenges you may face. As important as the corner stone in a building, the Shareholders Agreement (SHA) is equally critical to your company to make sure it is built on a solid foundation and durable through time, through thick and thin, through happiness and sadness, through sickness and health… you get the picture. Make no mistake, your startup is a marriage, just without the sex. Wait, your startup is a marriage. Full stop.
The SHA is your holy grail; your mantra; your motto; your essence of why you started the company in the first place.
A standard SHA should include a description of the Shareholders and their distribution of shares (that you already have in the registry but to clarify things); the purpose of the SHA, which is the “WHY” the shareholders are entering into the agreement; the share capital and the value of that capital; political and economic rights; and, here is when it gets tricky…the most important part of the SHA is the establishment of the rules to manage the company and what happens when someone wants to leave.
The SHA should include a clear specification of management (board vs lone director) and how the company will be managed. The frequency of your meetings, matters only to be addressed and decided by the management body, decisions that fall into all the shareholders hands to decide, remuneration, notices, and finally transfer of shares should all be outlined in your SHA.
It is also true that you make the rules and can pretty much include anything you want in the body of a SHA. It can be a 200 page novel that no one will ever read, or be a single page full of bullet points outlining the bare necessities. It really doesn’t matter, well it actually does, but it is up to you and your cofounders to do it properly. Meet with a good lawyer before you do anything and listen to him. There’s a reason they’re called counsellors. As a lawyer myself, I have tried to fix way too many situations that were 100% preventable if a proper SHA was established at the start. Don’t be one of those statistics! Common mistakes that all entrepreneurs make can be avoided by simply taking the right steps at the right time.
Put your thoughts together with your team, put them down in writing, and have a lawyer create an official document that will save you time, money, and fights with your friends. In the end, that’s all we want folks, happy founders and more successful exits.
Now, get your counsel on!