When starting a business, it’s easy to assume that everyone involved will remain on the same page about future business practices. A shared ideology on financial practices, ownership and management policies may be initially apparent. But part of running a smart business is setting the foundation of the business in writing to ensure a smooth operation over the life of the business. A comprehensive shareholder agreement is a key document to have when starting a business.
What is a shareholder agreement?
A shareholder agreement, or sometimes known as a stockholder agreement, describes the rights and obligations of a company. It delineates investors’ rights to information, regulating voting rights, any restrictions on transferring shares and rights of first refusal (or buy-sell agreement).
Why would a business need one?
Commonly utilized by smaller companies and startups, a shareholder agreement is a supplement to a constitutional document (such as a partnership agreement). This document is not public like a partnership agreement, and sets out the specific methods of handling problems such as methods to resolve disputes, e.g. arbitration. Ethical practices and roles within the company are also addressed.
By spelling out the terms, there will be less friction among members of the organization and shareholders have a guiding document if they suspect unfair practices.
Problems may inevitably arise in a new business venture; however, having a solid shareholder agreement helps dictate how those problems are to be handled. Rather than leave those problems up to messy disputes or litigation, referring to a shareholder agreement can lead to an agreed upon method of resolving the problems.
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