A shareholder agreement isn’t just a legal document, it’s the essence of what your company is.
Setting up your own business is a hugely inspiring experience. Most founders will talk of the thrill of the first day of trading, opening up new offices, hiring their first employees or winning that first customer and making a sale.
One thing you’re unlikely to hear being remembered with fondness is the day the founders sat down with their lawyers and wrote the shareholder agreement. That’s a chore, isn’t it? Something to be endured, rather than enjoyed.
Well, not quite. The shareholder agreement should be a bit more than that. A lot more, in fact. Here’s how you can turn what’s usually seen as a dry legal document into something that can inspire and drive your team on to success as well as help you avoid potential obstacles down the road.
More than just words
Shareholder agreements are, in legal speak, ‘a binding contract between a company’s shareholders which defines shareholders’ rights, privileges, protections and obligations’.
It’s understandable why that kind of language hardly makes the hair on the neck of an entrepreneur stand up. But while it’s absolutely vital to make sure your shareholder agreement is legally sound and drawn up correctly, smart leaders see an agreement as far more than just a formal document.
A good agreement will reflect your business. It will accurately present the structure you have in place, the processes that drive it and contain the essence of what your company ultimately wants to be. Get these things right and the agreement will be far easier to draft.
This is where you can put in writing clearly what the roles and responsibilities of your team are. Where you can set the goals for your company growth and put in place the rewards that will come when everyone works together to hit those targets. Think of it not as a mill around the neck, but a strategic document to help pull you up and keep reaching for where you want to be.
Avoid cookie cutter templates, build an agreement unique to you
A frequent mistake made by many founders is to craft an agreement from a template online, or base it on a previous agreement they may have been seen before.
This is dangerous. Your company is unique. It has unique goals and a unique team striving to reach them. Therefore, your agreement must be built with all these factors in mind.
To truly motivate the agreement has to consider the skills, roles and contributions of the people who will be working together to make your company succeed. Putting this in a formal document will give your team confidence that their work will be recognised and that the company is heading in the right direction.
Don’t avoid the awkward conversations
There’s little doubt shareholder agreements can be an emotional issue. Especially when a company is founded by close friends. As a result, many shy away from having tough conversations about the legal side of things until it is too late.
So if later on something goes wrong, someone wants to leave or somebody doesn’t fulfil expectations, then if the right agreement isn’t in place it can be a genuine roadblock to growing your company. In extreme (but not uncommon) cases it can actually rip a company apart.
Which is why it’s better to go through the ‘awkward stuff’ at the start, when relationships are at their best, rather than later when the pressure of running a larger operation is on and you can’t see the wood for the trees.
If you can educate your team as to why it’s important to get things right from the off, it’ll help bring them on board as well as make them realise just how important the right agreement is.
Always ask the experts
Lawyers are expensive. In an organisation’s early days, when capital is low and so much money needs to be found for setting up, it’s common to cut costs when it comes to hiring a lawyer to help with things like your shareholder agreement.
However tempting that is, resist. Think of it as investment. While you should approach your agreement in a positive sense to motivate your team, getting even the most minor detail wrong can by incredibly costly at a later time.
Take the hit now and you can avoid all sorts of possible issues. Additionally, a sound legal agreement will also impress future investors when they carry out due diligence, showing you are professional to the very core of what you do.
Keep it flexible
Finally, your agreement shouldn’t be set in stone. Your company is an evolving organism, changing as you hire new staff, open new offices and launch new products and services. So your agreement needs to change as well.
As mentioned earlier, your agreement should reflect what your company is and where it is going. So as these things change so must your agreement.
You can set a date to review annually or look to make changes when a major hiring is made or new goal set. Again, work with a lawyer to forge a mechanism that allows for flexibility.
An evolving agreement presents an image to your team of a company that refuses to stand still and keeps looking to improve itself.
So stop thinking of your shareholder agreement as a legal process, think of it as your company charter, leading you forward.