Offering shares in your company can be essential to raise the capital you need to grow. Yet, doing so can come at a heavy price. As soon as you have shareholders, you can no longer run the company however you want. You have a responsibility toward them in exchange for their investment.
Shareholders may not always be happy with how you run the company. They may question your decisions or believe you should move in another direction. If they have too much power, it could limit your ability to take action.
Shareholder agreements can prevent future problems
A shareholder agreement should make clear how you will deal with problematic situations. Here are some things to consider:
- How will you resolve disputes? Business litigation will cost time and money for all involved. Consider stipulating the use of mediation to fix things. Ensuring you hold a majority can reduce the chance there is ever a 50:50 tie when decision-making.
- What happens if a shareholder wants to leave: How will you value their shares? Who, if anyone, will have the first right to buy their shares?
- Can you force a minority stakeholder to sell? Let’s imagine you own the majority of the company and want to accept a fantastic buyout offer. Yet, someone with a minority share is refusing to sell and putting the whole buyout at risk. A clause saying they have to sell in specific circumstances can avoid the minority restricting the majority.
Before asking people to invest in your business, it makes sense to consider what will happen if things do not work out. Whenever people have money invested, this is always a possibility. When starting a business, you may hope for the best, but you need to plan for the worst. Having the correct legal documentation helps prevent disagreements from becoming disputes.