A Legal Guide to Setting Up Shareholders Agreements for Start-ups and SMEs in SA

There is an age-old expression that one shouldn’t do business with friends.

While this sounds sensible in theory, its neither practical nor is it good advice. Firstly, generally the only people available with whom to start a business with are friends. And secondly, why would you want to work with someone who isn’t a friend? Much more appropriate would be an expression that says “do business with friends, but make sure you have a shareholders agreement”. While it doesn’t roll of the tongue quite as easily, it’s probably more useful.

A shareholders agreement is a document entered into by the owners of a company that sets rules for how the company will operate, boundaries of responsibilities and solutions for future uncertain events.

Ideally, a shareholders agreement should be drafted by a lawyer, as there are various technical legal terms that should be incorporated to offer maximum protection to the shareholders involved. Moreover, while this may be the first or second time you’ve interacted with shareholder issues, a good commercial lawyer would have done so hundreds of times and will know a lot more of the potential pitfalls of a shareholder relationship.

However, any way you look at it, it’s the shareholders that need to have the underlying discussion about your specific shareholder relationship. While a lawyer can draw up the agreement, there is no substitute for sitting down and hashing out the difficult topics. A shareholders agreement is as useful as the paper it’s written on if it doesn’t contain the one crucial element: shareholder agreement.

With this in mind, here are six points that you and your shareholders need to discuss while working out the shareholders agreement.

  1. Role and Responsibilities

Technically, shareholders do not work for a company. While that may be true in the corporate space, in the start-up space it’s likely you will need every hand on every deck to stand a chance of success. So, while you may not have an employment contract, you will need to outline what your respective roles and responsibilities are to the company.

The deeper you go into working out roles and responsibilities, the less chance you have of tasks being missed or of a shareholder feeling that they are taking on a disproportional amount of work.

  1. Decision Making

At the beginning of a project visions are generally aligned. But as time goes on and your company has more facets to it, visions begin to differ. Moreover, not all decisions that have to be made are visionary. For example, someone has to decide whether to buy decent coffee or cheap instant coffee.

So, to ensure there is peace in the house, you need to decide on how company decisions are made. Do you vote? Do you discuss until you reach a unanimous decision? Do you arm wrestle it out? There are no set rules on how this should work, but it does need to work.

  1. Money In

You’ve probably noticed that your business needs some money to get off the ground. And you’ve probably agreed to how much money you’re each putting in. But what happens if you need more? Where does that money come from? Even if you can’t work out an exact plan, by confronting the issue you’re starting to look at options and considering your respective personal financial obligations to your new company.

  1. Money out

The basic concept is simple – when your business has profit, that money will be split proportionally according to your shareholding. But, things get a little more complicated. At what point does the business start paying these dividends and what happens if either of the shareholders need money before that point?  While you can’t predict the future, you can plan for it.

  1. What happens if one of you want to leave?

One of the crucial aspects of any relationship is addressing the idea that it may one day end. In fact, it’s so common that many of the issues you’ve heard of regarding people getting screwed over by their business partner have been when one of them wants to leave. No one likes to discuss the divorce during the romance, but it’s important to work out at least a plan of action so that you have a clear process to follow if the situation arises.

  1. Dispute resolution

Humans fight. As Oprah says, “if there is more than one person there is more than one opinion”. There is nothing wrong with a dispute if a resolution can be found. There are many ways to resolve a dispute, from fistfights to litigation. What you need to decide in your company is where you fall on that spectrum. If you land up in a disagreement with your business partner that you can’t solve, what do you do? Your shareholders agreement should contain a procedure to work it out. These rules can be as simple as agreeing to not post the issue on social media and can get as in depth as appointing your mediator (side note: mediation is an excellent solution for resolving disputes). The important thing is to have something to turn to in times of trouble.

As you go through the process of starting your business, planning your work flow and targeting clients – one of the items on your agenda should be to work out your shareholder relationship. Everyone in business starts out as friends, but just like friendships or romantic relationships take management, so do your shareholder relationships. The best way to get going is to have the discussion, reach agreements on the hard points and then put those agreements down on paper.

Author: Eitan Stern – Director at Legalese

To learn more about managing your finance as a freelancer visit Legalese. Legalese is a creative legal agency, which has redesigned legal services to suit creative and start-up businesses by making them accessible, affordable and understandable. Our new feature, DOUGH also has useful information and tips on work and money matters.

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