Shareholders Agreement

[Bornslippy]

Hello,

I'm new to these forums, but have been browsing for a couple of days. I must say I am very impressed at the level of expertise that I have seen in response to various questions, so thought I would pose a couple of issues that are currently concerning me. I will introduce our company formally in the introductions post when we are incorporated.

Anyway, I am in the process of setting up a ltd company with two associates (one male, one female who are a couple also). I am a UK citizen, my colleagues both live and work abroad in different countries. The company will be incorporated in the UK, through an agent. It is quite clear from our discussions that myself and one colleague will do the majority of the work in the beginning as the male associate has too much going on in the next year or so to contribute as much. I'm fine with this, and I'm sure we will manage without problem.

The main concern for myself regards the shareholders agreement. I'm certain we need one, but I am not sure how best to allocate shares etc and how to go about getting a legalised shareholders agreement. As it stands, the proposal is 35% each for myself and the female colleague and 30% for the remaining guy who is too busy to contribute as much work to the business. First, I am not convinced that we have to take all of the available shares, meaning we could leave some dormant in the company for the future. Second, does the fact that they are a couple (although they have separate bank accounts and relatively separate lives - as they live in different countries) weaken my position with respect to the dealings of the company. For example, there may be different implications if they get married. Finally, I think one work around regarding the differing work contributions could come in different forms of renumeration based on contributions to the compay. However, in the beginning at least, we are all willing to work for free to get the company moving.

Finally, I know we will need a formalised shareholders agreement. Any recommendations on the board as to who could do this? Also, a rough idea of costs would be very helpful too.

Hope you can help

Ben

 

[Cornish Steve]

Let me temper what I write by stating that I am familiar only with setting up in the US - which is hardly relevant here. Why I thought to write, however, is that citizenship or residency is a condition of some types of company ownership. In my own case, I cannot extend ownership to non-citizens who are also non-residents of the US. It's at least worth double-checking this point in the UK.

As for percentages, I'd advise against giving the same percentage to you and to your colleague. At such as early stage of your company, someone must be clearly in charge. In my case, I started with 55% and my business partner began with 45% (she actually wanted it to be 60/40). Even 51/49 would have been better than 50/50. In your case, it's more complicated because there are three of you. You might want to set some time aside with them to discuss the matter openly.

 

[The Resolver]

Ben

Some bullet points :-

* As Steve rightly says,start ups need someone clearly in charge. In a 2 person start-up the 'touchy-feely/aren't we just best of pals' 50/50 arrangement is often doomed from the lack of decision making control when tough decisions need to be taken. An even split between three is even weaker. Governance and control at a personal level is THE main focus of VCs rather than the business idea/plan/model. When things go wrong you can always change the business plan/model but changing the decision making/ownership usually requires a bus load of lawyers.

* In the suggested split no two people even have 'special resolution' contol. To explain,whilst most decisions only need 51% to be taken , certain fundamental decisions about the construction of the company, eg changing the Articles, altering capital, winding up etc require 75%. Usually whilst one would not want 75% in one person ,it is better to have two able to do so in the case one person becomes difficult to deal with.

* You say nothing as to whether any one of the three is the key person,ie his or her 'big idea'or with special experience/knowledge. All of what I say is subject to special factors at a personal level. A key person such as this must be motivated fully by his ownership in the company. Its a big mistake for an investor to give so little that the key man is constantly left to think about leaving and setting up on his own.

* The fact that two are a couple is a potential major problem area. This means that decisions, especially in difficult areas, may be made by your colleagues not wholly for corporate/commercial reasons but affected by emotive and personal issues, as in 'if you don't vote with me, I am leaving you'. Companies should be driven from the boardrom not the bedroom.

* The Shareholder Agreement needs clauses to cover the corporate relationship between all three shareholders especially as to transfer of shares/death etc so the personal relationship has no impact. What happens if they have a huge bust up and won't talk to each other? What happens if one dies.You want the shares to be capable of being divided equally amongst the remaining shareholders.But unless something is said the survivor may have rights under a will or intestacy.

* You say nothing as to the boardroom. This is where the main functional decisions are taken. If all are to be directors,what if you disagree with the other two. They effcetively have day to day control, but as the man will not spend much time on it effectively his lady will run the company herself safe in the knowlege that her partner will give her total boardroom control. Perhaps some balancing is needed in the Agreement eg you be chairman with a double vote or the man not being a director. However this creates potential stalemate so may need a casting vote. Stalemates are less of a problemat boardroom level since you do need day to day decision taking/policy/planning to be reasonably unanimous and, if the problem is significant, you can always change the board by shareholder vote. But at least better to have staelmate than you effectivly by default give the casting vote to the guy who will not spend much timeon the business.

* You MUST look on the bad side- what if things go wrong. Include a dispute resolution clause (free one on our site - www.TheMediationRoom.com or PM me) so you do not play a mutual money destruction game feeding teams of lawyers in the courts.

* One possible split is for either you or both of the others together to have 51% with their share split equally between them.

* You should take personal legal advice now. I can locate someone for you at reasonable cost to advise and draw up the Agreement from our panel at www.TheSolicitorsRoom.com. He/she who will communicate with you fully online . Use 'guest' as the username/password to see the demo file and how it all operates.

* As you are in two or three countries, you might also consider www.YourCompanyInteractive.com - another configuration of our software -again use 'guest for a few demo files. This enables online /archived boardrom/management meetings and dealings with suppliers/customers/staff in a way that all three of you have access where appropriate. Much much more convenient and safer than email.

Finally, please do not let any of the above put you off! Its just a way of telling you to remember to tie your shoelaces when you leave the house. Best of luck with the business.

__________________
Graham Ross
The Mediation Room
www.TheMediationRoom.com
www.TheSolicitorsRoom.com
\"See You Out Of Court!\"

 

[Bornslippy]

* In the suggested split no two people even have 'special resolution' contol. To explain,whilst most decisions only need 51% to be taken , certain fundamental decisions about the construction of the company, eg changing the Articles, altering capital, winding up etc require 75%. Usually whilst one would not want 75% in one person ,it is better to have two able to do so in the case one person becomes difficult to deal with.

* You say nothing as to whether any one of the three is the key person,ie his or her 'big idea'or with special experience/knowledge. All of what I say is subject to special factors at a personal level. A key person such as this must be motivated fully by his ownership in the company. Its a big mistake for an investor to give so little that the key man is constantly left to think about leaving and setting up on his own.


Thanks Steve and Graham for your replies.

Steve – there is not a problem with having non UK residents as company directors or shareholders. I’ve checked with Companies House and through other sources as well.

As for the rest, we are all friends. I am astute enough to know that that would count for nothing should any disputes arise. The company structure will be myself as director and my male colleague as director. Our female colleague will be a shareholder only, but I guess she would work as a consultant for the company. Idea wise, there is some equivalence here but it was probably me who pushed it forward and did all of the background work regarding setting up the company. I came up with the website name (our trading name) and we have jointly come up with the actual company name. Our female colleague has more experience in the area in which we will work, and has been primarily responsible for the website so far.



* The fact that two are a couple is a potential major problem area. This means that decisions, especially in difficult areas, may be made by your colleagues not wholly for corporate/commercial reasons but affected by emotive and personal issues, as in 'if you don't vote with me, I am leaving you'. Companies should be driven from the boardrom not the bedroom.

I fully appreciate this, and my concern is a scenario whereby it is easier for them to agree with each other (and out vote me) than disagree. The other concern lies with me being kicked off the board because they get together and decide to oust me. Anyway, this aspect does sound resolvable as I guess we could put in various clauses in our shareholders agreement.

* The Shareholder Agreement needs clauses to cover the corporate relationship between all three shareholders especially as to transfer of shares/death etc so the personal relationship has no impact. What happens if they have a huge bust up and won't talk to each other? What happens if one dies.You want the shares to be capable of being divided equally amongst the remaining shareholders.But unless something is said the survivor may have rights under a will or intestacy.

I would imagine that we could draft up these clauses with a lawyer if he/she knows all aspects of our relationship. I wouldn't imagine we will get too much disaggreement here.

* You say nothing as to the boardroom. This is where the main functional decisions are taken. If all are to be directors,what if you disagree with the other two. They effcetively have day to day control, but as the man will not spend much time on it effectively his lady will run the company herself safe in the knowlege that her partner will give her total boardroom control. Perhaps some balancing is needed in the Agreement eg you be chairman with a double vote or the man not being a director. However this creates potential stalemate so may need a casting vote. Stalemates are less of a problemat boardroom level since you do need day to day decision taking/policy/planning to be reasonably unanimous and, if the problem is significant, you can always change the board by shareholder vote. But at least better to have staelmate than you effectivly by default give the casting vote to the guy who will not spend much timeon the business.

The two males will be directors, although this is for practical reasons. My male colleague will have a smaller role for the next year or so. Our female colleague doesn't want to be a director for the time being, but may become one later. I don't have a problem with this, as my friend is already committed to his education that needs to be completed. They have suggested having a rotating chairmanship, where one person has overiding control for a set period of time.


* One possible split is for either you or both of the others together to have 51% with their share split equally between them.

I initially thought of such a split, but they didn't agree with this. I think we will all have relatively equal ownership of the company, and I don't really have a problem with this per se. The male colleague has suggest having less shares because he will make a much smaller contribution in the early days. I think we can counter this slighly by paying the people who contribute the most work to the company. The overiding concern is that effectively they will have around 65% of the shares between them (although they will be owned as separate individuals). I guess we could have a clause such that they cannot transfer shares to each other. I also suggested bringing another shareholder in, but they didn't like this idea either.

* You should take personal legal advice now. I can locate someone for you at reasonable cost to advise and draw up the Agreement from our panel at the solicitors room. He/she who will communicate with you fully online . Use 'guest' as the username/password to see the demo file and how it all operates.

Thanks, I will look into this also. Is is possible to give a rough idea of cost to draw up a shareholders agreement? I guess, in part, this is governed by how long it takes, but a rough idea would be useful at this stage if possible.

Many thanks

Ben

 

[The Resolver]

Ben, if you use the online file at www.TheSolicitorsRoom.com then the avoidance of meetings/secretarial work etc and with the lawyer working in his own time, should ensure a very low fee. If you complete the form on the site and mention UKBF,I will obtain a few quotes for you to consider.

Use of the online platform will enable each of you to be involved in the process of instructing the lawyer so as to better ensure the final Agreement truly reflects all the detail of what all want without the sort of misunderstandings that can occur. For example,a common problem is when people discuss with their proposed partners by phone and then all think they have agreed the detail yet each has a slightly different spin ,or an item is innocently omitted by the one instructing the solicitor and then overlooked by the other when the Agreement is drawn up. Howver by use of the private discussion file the lawyer can check everything agreed is included and ,moreover,there is an archive of the discussion in case of a need for a future interpetration.

Graham

 

[bwglaw]

I would be happy to draft a Shareholders Agreement along with any Directors Service Contracts. If you email me your requirements to the email address below I will be able to give you a quotation.

Jonathan

 

[Bornslippy]

Thanks for all the input guys, it has been pretty helpful so far and has certainly pointed me in the right direction to regarding the issue. I may be in touch with some of the solutions provided to me in the immediate future.

Thanks

Ben