If your business involves more than just yourself, then getting a shareholder agreement is a must. Whether you’re starting a company with a family member, a best friend, or even your significant other, you don’t know what may happen when the business turns sour. A shareholder agreement lets you and your business partner(s) prepare for the worst and create predictable outcomes for future events.
This article will explain what a shareholder agreement is and why it’s important. Then it explains why hiring a lawyer is the best decision when drafting a shareholder agreement, and what the shortfalls are of doing it yourself.
What is a shareholder agreement and why is it important?
In the simplest terms, a shareholder agreement is a contract between you and anyone else who owns shares in your company. The contract sets out how people may enter and exit as shareholders, how disputes are managed, how shareholders are compensated, and much more.
Even if your company is doing well, it’s important to think of the worst-case scenarios when drafting a shareholder agreement. It’s much easier to draft this contract when the company is doing well than to try to scrap an agreement together and negotiate with shareholders once things start going downhill. Think of issues such as the death of a shareholder — what would happen to their stake in the company? Or what if one of the shareholders goes through a divorce and is required to provide their former spouse half of their assets? These are the scenarios a shareholder agreement protects you and your company from.
Do it yourself or hire a lawyer?
If your company is young, it may not be easy to come up with a few thousand dollars to pay a lawyer to draft a shareholder agreement. Even simple agreements can cost $1,000 to $2,000, while more complex contracts can even go up to $10,000. But because a shareholder agreement is a contract, it’s always best to enlist the help of a lawyer who understands the terms and conditions required in a legally binding contract. A lawyer can help guide you through the process of creating your shareholder agreement in a way that you can’t do yourself.
A shareholder agreement template from websites such as LawDepot or PandaDoc can seem like a cheaper alternative to hiring a lawyer. But at the end of the day, your business is unique, and a one-size-fits-all template may not be the best solution. Many templates also use legal jargon that you and your business partner(s) may not understand. Legal help would clarify any complicated terms and make sure that these terms don’t harm you or anyone else down the road.
Additionally, DIY shareholder agreements can lack appreciation for the different roles that the shareholders in your company play, the special conditions regarding the industry your business resides in, the particulars of buy-sell provisions for shares of your company, and other similar issues. This contract is insurance against the worst-case scenario that can occur in your business. By taking a shortcut, you could be cheating yourself.
A DIY shareholder agreement can also hurt your opportunities in receiving new financial capital for your business. If you’re ever planning to look for investors or to get a loan, the investor or lender will do due diligence on your business — this includes reviewing your shareholder agreement. Certain terms in a DIY agreement and the reality of your company may not line up, or certain sections may not make sense. This can appear unprofessional and provide an investor or lender with a reason to back out.
If you’re thinking of starting a business or already have one in which you’re one of the multiple owners, you should have or at least consider having a shareholder agreement. This contract between you and your business partner(s) protects the business from worst-case scenarios. And by enlisting the help of a legal professional, you make sure that potential legal issues are identified, that your shareholder agreement makes sense, and that everyone is protected.