Why you need a shareholders agreement

Launching a new business venture is an exciting chapter for any new entrepreneur. However, when entering into any business relationship, one should remain objective when concluding a shareholders agreement. It may prevent any disputes and ensure a gracious exit for shareholders wanting to exit.

 

This is precisely the lesson Karen learnt when starting her marking business. Karen met Josh when they were still employed. They got along well and thought of starting their own business after both of them left their mutual employer. Both thought this would be great and easy, so they quickly registered a company. Karen would be in charge of the systems and processes and Josh business development. Soon, things became busy, and before they knew it, both were doing everything in the business.

 

Josh’s mother fell ill, and he decided to exit the business. Still, because he and Karen never spoke about valuations nor kept track of contributions properly, they soon disagreed about the terms.

 

Josh and Karen could have avoided any disagreements about the valuations if they had concluded a shareholders agreement early on in their engagement.

 

A shareholders agreement is a valuable tool that sets out a number of important provisions, such as:

  • How to value shares
  • How to deal with it when the business needs cash and how to deal with it if all shareholders are unable to contribute
  • Exit – whether voluntary or through a forces procedure (e.g. due to a change in circumstance such as long term illness and death)
  • Confidentiality and Protecting the Business’ Information
  • Dispute Resolution

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