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Shareholder agreements give firms the focus they need to thrive

Posted on 18 May 2016 by Jonathan Berman. Source: City AM

Shareholder agreements give firms 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.

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