How important is Shareholder Agreement for your start-up?

How important is Shareholder Agreement for your start-up?

A shareholder agreement is a contract signed voluntarily by all of a company’s shareholders. It establishes regulations for policies and processes that are not covered by the forming agreement of the company. It governs the rights, duties, and relationships between the shareholders. Basically, it serves the purpose of providing common understanding among founders and investors to regulate day to day tasks. Apart from this, it formalizes a structure to be followed in case an investor leaves the company or a new investor joins the organisation.

The Shareholder Agreement is intended to treat shareholders fairly while protecting their rights. The agreement protects present shareholders from future management’s abuse. It is primarily concerned with being prepared in times of market instability.

Why Shareholder Agreement is important for a start-up?

A Shareholder Agreement provides legal protection to the start-up by managing future scenarios and determining answers to anticipated future difficulties.

To safeguard the start-up when shareholders disagree: To safeguard the corporation and its shareholders, Shareholder Agreement should be put in place. This is because stockholders are not always faithful to a firm and may try to align with competing corporations, causing troubles for the start-up. The agreement will spell out what steps must be followed if the two parties disagree.

To protect minor shareholders: A Shareholder Agreement for your start-up is an effective approach to protect minority shareholders, or those who have invested in the company. The agreement will define the roles and obligations of all parties, including shareholders, management, and other stakeholders. If members of the board of directors disagree, the agreement will specify how to handle the situation.

To make share transfers easier: The agreement describes the procedure of transferring shares in a corporation. It determines what occurs when one shareholder sells their shares to another or when the start-up decides to buy back shares from shareholders. In general, shareholders cannot sell their shares until a written agreement is executed.

Dispute resolution:  The agreement is required for a start-up in order to avoid disputes and to ensure that all of its shareholders are on the same page. It may include a clause of dispute resolution. Start-ups can adopt methods of dispute resolution outside the court in order to avoid litigation expenses.

Company management: The agreement specifies who owns how much share of the company and what they should do with their stake. It can also specify how many votes each stakeholder has in the company.  It can help prevent individuals from acting against the wishes of their fellow shareholders.

To sum up, a Shareholder Agreement is the best financial security if you have a start-up or are thinking about launching a new firm with partners, investors, or co-founders. When everyone understands and agrees on how the organisation works, there will be simpler transitions when someone departs, a new person joins the team, or when issues develop. It establishes a predetermined structure for dealing with a wide range of regular business scenarios.

-Kiranpreet Kaur

Associate at Aggarwals & Associates, S.A.S. Nagar, Mohali