What should I look out for in a shareholders agreement?
July 13, 2011 8:13 PM Subscribe
I am co-owner of a (very) small company, and the lead owner's attorney has prepared a shareholders agreement that I'll be reviewing this week. While I expect it to be a standard document and possibly even a standard form, I still want to be aware of what I'm signing. What are some key provisions I should look out for?
This all being said, I do plan to retain an attorney to review the agreement and provide advise. But, I'm curious to hear what the MeFi folks have to say, too.
And, yes, I know I should have had the agreement before becoming an owner... but it's complicated.
This all being said, I do plan to retain an attorney to review the agreement and provide advise. But, I'm curious to hear what the MeFi folks have to say, too.
And, yes, I know I should have had the agreement before becoming an owner... but it's complicated.
There is literally nothing that you can reasonably take from the experiences of others in your situation, except for those who say "I should have consulted an attorney." Some people will have gotten a good deal, others will have gotten a potentially bad deal that didn't happen to go bad, and still others will have gotten a deal that could not possibly have been good for them. And it's all in the the agreement, which even you haven't seen yet.
Find an attorney you're comfortable with, who takes the time to find out what your expectations are, and who explains in a way you understand how a deal could fail to meet your expectations. I like to say that lawyers are professional pessimists. If a deal can go bad, I consider it my duty to figure out how and to explain that. You may decide that the reward is worth the risk, but my goal is to never have a client say "but I didn't know that could happen!"
posted by spacewrench at 10:10 PM on July 13, 2011 [2 favorites]
Find an attorney you're comfortable with, who takes the time to find out what your expectations are, and who explains in a way you understand how a deal could fail to meet your expectations. I like to say that lawyers are professional pessimists. If a deal can go bad, I consider it my duty to figure out how and to explain that. You may decide that the reward is worth the risk, but my goal is to never have a client say "but I didn't know that could happen!"
posted by spacewrench at 10:10 PM on July 13, 2011 [2 favorites]
I really, really, really hate to say this, but after you've consulted with an attorney, and done your best to understand what he tells you... go and consult another attorney. I'm speaking from being a witness to a friend's experience. Attorneys, doctors, plumbers, car mechanics, whatever-YOUR-profession-is, are like any large group of people: some will be competent, some not, some so-so. And this is not to immediately assume you cannot trust your attorney, but simply that another pair of eyes and another point of view, can be very instructive. If what both tell you overlaps 100%, great - all you're out is a consulting fee. But more often than not, at the very least, you'll find some additional nuance that may prove to be very helpful. I know this escalates your costs, but it's worth paying a bit more for that peace of mind.
posted by VikingSword at 10:34 PM on July 13, 2011 [1 favorite]
posted by VikingSword at 10:34 PM on July 13, 2011 [1 favorite]
Yes, consult an attorney AND a good tax accountant because you will want to know tax implications. Things can get hairy depending on what kind of corporate entity this is, how the agreement is structured, how you will or won't be paid, etc.
Don't ever, ever, EVER go into an agreement without getting a good attorney and a good tax accountant.
I had the attorney when I signed in 2005, but did not get an accountant that could help me navigate the muddy waters. I wish I had, would have saved me a crap ton of $$$$.
posted by SoulOnIce at 3:06 AM on July 14, 2011
Don't ever, ever, EVER go into an agreement without getting a good attorney and a good tax accountant.
I had the attorney when I signed in 2005, but did not get an accountant that could help me navigate the muddy waters. I wish I had, would have saved me a crap ton of $$$$.
posted by SoulOnIce at 3:06 AM on July 14, 2011
Start by making sure the lawyer creating the document completely explains it to you. This is a necessary first step so that you understand at least what the lead owner is trying to achieve. Remember generally professional ethics means he shouldn't lie to you, but he's still not your lawyer. Then review the document with an experienced business lawyer. Given that you're already a co-owner, presumably without a shareholder agreement, then having one is generally a good idea.
The things to look out for are any clauses that impact your ownership of stock, such as a right for the company or other shareholder to repurchase it. Rights of first refusal on sale of your stock, i.e. giving the other shareholders the right to buy any stock you wish to sell before you can offer it to anyone else (this kind of thing makes it hard to sell your share of the company). What happens under a change of control, i.e. if the business is sold then what happens to your share. Look at voting rights, basically what decisions require a shareholder vote and what proportion of the stock is needed to affect the change. For example simple majority or two thirds. This really comes down to who has ultimate control of the company. None of these things are necessarily bad, but you should understand how they work.
An important point is that all owners of the same class of stock have the same rights. So for example a right of first refusal also gives you that right should another shareholder want to sell their stock.
Keep the transaction friendly, lawyers tend to spin eachother's wheels, and asking two of them to get together to negotiate something can quickly go down a rat hole of legalistic mumbo jumbo. The best way to do it is that at the business level, the shareholders should agree what they want in plain simple terms and just use the lawyers to turn that into the correct language.
posted by Long Way To Go at 10:22 AM on July 14, 2011
The things to look out for are any clauses that impact your ownership of stock, such as a right for the company or other shareholder to repurchase it. Rights of first refusal on sale of your stock, i.e. giving the other shareholders the right to buy any stock you wish to sell before you can offer it to anyone else (this kind of thing makes it hard to sell your share of the company). What happens under a change of control, i.e. if the business is sold then what happens to your share. Look at voting rights, basically what decisions require a shareholder vote and what proportion of the stock is needed to affect the change. For example simple majority or two thirds. This really comes down to who has ultimate control of the company. None of these things are necessarily bad, but you should understand how they work.
An important point is that all owners of the same class of stock have the same rights. So for example a right of first refusal also gives you that right should another shareholder want to sell their stock.
Keep the transaction friendly, lawyers tend to spin eachother's wheels, and asking two of them to get together to negotiate something can quickly go down a rat hole of legalistic mumbo jumbo. The best way to do it is that at the business level, the shareholders should agree what they want in plain simple terms and just use the lawyers to turn that into the correct language.
posted by Long Way To Go at 10:22 AM on July 14, 2011
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Are the shares given to you outright, or is it done in stages or based on some criteria?
What happens if you leave the company, either willingly or not? Is there some kind of clawback provision by which shares can be forcibly re-purchased from you?
Is there some kind of anti-dilution policy, assuming you are aiming to get angel or VC funding? (Ignore this question is you're not aiming for that)
Are there different classes of stock at your company? Or is it all common stock?
posted by jasonhong at 9:01 PM on July 13, 2011