Why do I need a shareholders agreement?

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As a start-up most of you will kick off with one or more co-founders with no formal structure in place.  You might operate as ‘partnership’ in the early days while you validate your idea, acquire some early users and maybe even some sales.  Perhaps it’s time to get serious and create a company to run your start-up?  (If you’re wondering when the best time is to create a company, read here)

If a company is for you and you have one or more co-founders, you’ll each receive ‘shares’ in the company - so you’ll each be ‘shareholders’ and this is when a Shareholders Agreement comes into play.

A Shareholders Agreement is a contract between each of you (the shareholders) and the company itself.  It sets out things like the number of shares you own, who the directors of the company will be, your commitment to the company, your voting rights, but perhaps most importantly; what happens when someone wants out.

If a shareholder turns nasty, they can be forced out for breaching the agreement

For example, if one of you wants to sell your shares, a typical agreement will give the other shareholders the first right to buy your shares and a method to determine the price.  Or, if a shareholder turns nasty and damages to your start-up, they can be forced to sell out (at a heavy discount) for breaching the agreement.

Thinking of these issues up front may take you out of your comfort zone, but it’s a healthy reality check to ensure you and your co-founders are on the same page from day one.