December 2023
Oh, yes you do.
When you start a business with your friends, the big dreams and infectious midnight epiphanies are exciting. The future seems full of promise. And better still, you’re on the same page – you know each other well, and you trust each other implicitly. So why would you need a formal shareholder agreement? The short answer is, because of that very reason – because you are friends.
First, let’s establish what a shareholder agreement is. Simply put, it’s a contract between the shareholders of a company, and the company. It dictates how the company should operate and outlines the rights and responsibilities of the shareholders.
‘But we’re friends’, you might say. ‘We get each other’. While that might be true on a personal level, when it comes to business misunderstandings can arise, even amongst the best of friends. A shareholder agreement is not a sign of mistrust, but rather a tool to prevent misunderstandings and ensure that all parties involved have a clear understanding of the company’s operation, their rights, and their obligations. All going well, it’ll help you stay friends.
Another critical reason for a shareholder agreement is to plan for the unforeseen future. What happens if a shareholder wants to sell their shares? Or if a shareholder passes away? What if disagreements occur about the direction of the business? These are all possible scenarios, and having a shareholder agreement can help provide clear, pre-agreed answers. It’s also much easier to agree these things up front, rather than arguing about them once a problem has come up.
A shareholder agreement can also set out a fair process for making decisions. This can cover everything from the day-to-day running of the business to more significant decisions like the sale of the company, or changes in structure. It provides a roadmap for decision-making that everyone has agreed to in advance, reducing the potential for future disputes.
Most importantly, a shareholder agreement protects both your business and your friendship. It acts as an insurance policy, ensuring that everyone is treated fairly and knows what to expect. It can prevent disagreements from escalating and keep your friendship from becoming a casualty of a business dispute.
While starting a business with friends can be an exciting adventure, it’s important to remember that it’s also a serious legal and financial undertaking. A shareholder agreement might not seem necessary when everything is going well, but having one in place can save a lot of trouble down and cost the line.
You need a shareholder agreement not in spite of your friendship, but because of it.