Tuesday 17 May 2016 7:06 pm

Shareholder agreements give startups the focus they need to thrive

Building a business is a labour of love. Not just for the founders, but also for the employees and investors. I regularly sit down with founders to go through shareholder agreements. The process uncovers the real objectives for starting the business, it gets founders thinking about issues before they happen, and it gets to the heart of the founders’ mission.

The most successful businesses we work with are able to focus their energy on selling to their customers. To do that effectively, they first need to align the business internally behind some key principles, which bring clarity and allow them to identify what the true mission of the business is. This alignment process can flush out some difficult issues which have to be confronted: what are the timeframes for key business milestones; what happens when the funding runs out? Our role is to help founders navigate those conversations internally.

Scenario planning nips disagreements in the bud before they become critical. Awkward conversations are conducted and battles fought at the outset. It acts as a roadmap for how the business will grow and stops problems cropping up further down the line. Without working these things out in advance, co-founders can easily fall out.

Shareholder agreements are an opportunity to flesh out the details. I’ve never had any clients fall out and I think the main reason for this is the series of fundamental questions I ask in the process of creating a shareholder agreement. For example, we get to the bottom of the period of commitment: if the founders were to both put in £100,000 with an expected commitment of three years, if one of the founders wanted to leave, the other might expect to be entitled to compensation. There’s a misconception that these agreements are just a piece of paper – in practice they really do act as a blueprint for dealing with disagreements.

This process of alignment helps entrepreneurs mould their vision: anything from whether, when or how to expand internationally to whether, when and how much additional funding to put into the business. If one founder is adamant that they can put, say, £200,000 into the business, both founders will know and will cut their cloth accordingly.

People, of course, sometimes change their mind, but that’s where the value of having previously agreed what to do in such a scenario is vital. Once someone has agreed something in writing, it’s the job of the person who has changed their mind to convince the other person. Even if they fail to get their way, they’ll feel a lot less resentful because of the previous agreement.

We spend a lot of time dealing with co-founders without robust agreements who have fallen out. Perhaps ironically, the fallouts tend to happen when businesses are making a lot of money. Often it’s connected to the success of the business and sometimes it’s the result of a business outgrowing one or more of the co-founders.

If managed well, putting an agreement in place from the start is of huge value to the development of the company. It sets a clear direction for the management team and brings greater clarity of vision for the future of the organisation and how it can deliver against its mission. There are many things that go into building a successful business, but too many end in avoidable discord. Even a labour of love benefits from a solid contract.