Shareholders Agreement and Team Building

Shareholders Agreement and Team Building

When starting a business if there are going to be multiple shareholders, it is important to agree beforehand on certain areas of the business before setting it up. This will allow the team to work towards one common goals and will avoid headaches and pains in the future that might lead to the failure of the business.

The main elements of a shareholders agreement are:

1. The business reason; what is the reason to build the business.
2. What is agreed between the shareholders.
3. The legal side or jargon, this needs to be checked with a lawyer.

The shareholder agreement is a private document intended to establish matters that could be conflicting in order to prevent the conflict from ever happening. In other words, the purpose is to go through all the possible future difficulties beforehand. If problems arise the agreement would be binding and would resolve the conflict. The target is to make it both flexible and fair but also strict (structured well). A big part of what will go in the agreement are validation of the conversations that supposedly have taken place prior to setting up the business. The cheapest and best way to approach it is to use a template as a guide, draft your own agreement and then have it ok'd by a lawyer.

When establishing a business, the proper process with the fellow shareholders is:

1. Discussion about the business you want to create
2. Agreeing on all the details and possible points of conflict in the future.
3. Drafting and locking the shareholders agreement.

To breakdown the main issues that will simplify the process of developing a shareholders agreement, the main points that need to be agreed are:

- Vision
- Mission
- Exit Strategy

VISION:
When establishing a business, you need to have a "vision" of where you are going in the long term. The vision is the guiding light. The vision needs to be agreed and has to be aligned for all shareholders. When everybody shares the same vision then it is easy to establish long term commitment for all shareholders. Also, vision serves to make strategic decisions. You need to know where you are going and this is why vision is so important, it sets out the journey over time. o, for the sake of clarity, when you set up a business, there needs to be :

1. A vision
2. A Shared vision among shareholders so that you start from a mutual point.

MISSION:
Mission is the why. Why you do what you do. It is essential that the shareholders agree on the mission and that it is aligned and mutual for all shareholders. The mission answer the question of why the company needs to exist. The mission statement should in one short sentence define it. Take for example Google's mission statement:

Google's mission is to organize the world's information and make it universally accessible and useful. 

It clearly defines the mission and why google exists. Your mission statement should be reflected in similar ways. If you cannot come up with a mission statement for your business, you should reconsider establishing the business to begin with.


EXIT STRATEGY:
A good company outlives you, once it has been established it has the purpose of existing. For this reason an exit strategy should be established, especially in instances where you might die or become incapacitated. The goal is to build something that no longer needs you.

Before doing anything, shareholders need to agree on vision and mission, first and foremost.

Corporate Culture:
Every company has a culture. As an entrepreneur you can either let the culture become from the team you have or you can design the culture you want for your company. In order to do this you need to find and define the values, i.e. whether it will be transparent or not, hierarchical or flat, etc. Your chances of success are greatly improved if you deal with this and design the values an culture so that they can boost the business. You need to live through the values you create.

Attitude is much more important than the skills a person may have. With attitude you build a culture. Building a business is a marathon, people with good attitude will always outperform the ones with just good skills. For this reason and especially in a startup you need to keep a close watch on this, especially to avoid things like "the princess syndrome" an instance where the bad attitude of one member can kill the team.

Once all things have been discussed and agreed we would need to get into specifics and details of what composes the shareholders agreement:

1. Founders. Who are they?

2. You start with a company that has nothing, so you as a founder need to give something to the company.

3. The Company has the right to use everything that the founders bring into the company as well as anything that is developed by the company. It is always best to start from the toughest position, this way as you work down it will become easier. It is also important to establish what happens to this property if the company closes.

4. Competition clause and time. This clause establishes that you won't go do something that competes with the business you are founding. It should also establish the amount of time you can dedicate to the business and what your level of commitment is. For example, one founder might decide to commit financial resources to the business but to not dedicate any time, while another might dedicate full time to the business but no financial resources.

5. Communication: This is a mechanism that the triggers the possibility of communication if needed and how it will occur. Whether by phone, meeting, etc.

6. Disputes. this clause defines the process to handle issues. It could be for example:

• Call a meeting
• If you can't agree then for example use an external business advisor. 
• Different procedures. 

The goal is to avoid court since nobody really wins when going to court and there is a better chance negotiating.

7. Market Value Determination: This establish the process to determine the price per share in the case that one of the founders wants to leave or somebody else wants to come in. When determining the market value of a company you will have different values: for the tax office you want your business to be valued low; for investors you want your business to be valued as high as possible. Between the founders the value would be somewhere in between these two, at midpoint. It is standard that the price per share is agreed and determined every three months or so (transactional price). This representation is the same as stock prices in the listed companies. The Company's value is always a guess.

8. Rules for the founders. How do we work, how many hours, what everybody's responsibility is, title, core responsibilities, etc. It can be as strict or as light as you'd like.

9. Ownership Structure: How many shares should each shareholder have. This should be as logical and as transparent as possible. The main contributions to account for here are: Money, Time and other capital contributions such as patents, intellectual property or anything of value.

Money is important however the main thing is time that is being contributed, the time commitment since presence is one of the most important things. Contributed time should grant a person a stock package. It should be structured with a ten year vision but a commitment for at least three years. So each founder needs to determine how much time they commit and are willing to bring to the table in a  three year period. In this clause it should also be agreed what happens with a breach to the agreement. It is common to be able to trigger the voidness of the shares of a breaching founder (vesting rights). Whether the person leaving is a good leaver or a bad leaver, it is important to protect the company from a bad founder. You can have them have some shares with no voting rights. You can have an additional clause to make a bad founder sell only into the company and in the case the company has no money then it could pay with future revenues. All this needs to be predetermined.

With regards to the company's shares, you can have different types of shares with variables, like voting shares or no voting shares, etc. However in the founding stage it is better to keep it simple.

10. Jurisdiction. Under what laws will the agreement be constituted.