What Shareholder Agreements Are Really For

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We’ve recently got involved in two shareholder agreements. In the first case this was an existing client who wanted to strengthen their management team, and give a potential exit route for one shareholder. The other is a start-up, and there was a need to motivate key partners particularly in marketing and digital development for their cloud-based service.

The lawyers produced a shareholders agreement, which lays down the rights and obligations of all the parties. In both cases the lawyers were pragmatic, commercial, and helpful. But their involvement stops when the agreement is signed, and they only get involved again should some problem arise.

Problems arise generally in two ways. There can be some element of bad faith or, as is more usual, a poor appreciation of what is required followed by a realisation that it cannot be delivered by one or more of the parties to the agreement. They’ve simply been too enthusiastic, and realised that they need to put bread on the table and this new venture is taking too long or too slow, so doesn’t provide enough in the time they though. So their time leaches away as they find something else to supplement what they get from the start-up.

We’ve talked before about enthusiasm – how necessary it is, and sometimes how misplaced it can be. It’s to be expected, especially in something new, that they won’t appreciate what’s involved. For a complete new venture they have less hard information to assess and plan.

To mitigate against this happening, we think it’s essential to maintain the cultural ethos and values – the mission – of the business. It starts off clear, well-intentioned, and focused. Over time in any business this can dissipate or change, and the vicissitudes of new people or a start-up – particularly a start-up – bring so much more information about what’s working and what’s not that the initial clarity can be quickly lost.

We think it essential that management regularly reflect on the values and mission of the business as these may well need to be refined over time. What tends to happen is that some parties cleave to the original mission, but over time the business changes shape so that other parties find it more difficult to reconcile what they’re experiencing with what the original thoughts and actions were. This disconnect is seldom explicitly explored, so the gulf grows wider between the parties until they have to go back to the lawyers and the shareholders agreement.

Lawyers really don’t want to see you again on the same topic. They don’t want litigation: they know how costly it is, and they know how nobody really wins. Apart from the cost, the time and lack of focus that this distraction brings, often causes irreparable damage to the business.

We suggest that a regular view of mission and values can help to avoid this. The parties could simply reflect on their mission and values and express what they are experiencing, and if one or more of the parties’ experience is significantly different, they can rebalance it for everybody’s benefit.

After all, if they didn’t need all those people in the first place they wouldn’t be in business together. So it seems simpler and easier to expect change to occur frequently and accommodate it in a flexible way rather than having to wait for a more rigid legal structure to kick in to everybody’s disadvantage.

We’ve talked about mission and values before, and how to construct your mission statement. In these blogs we discussed how this helps with growth and building your team as well. A clear strategy, rebalanced regularly throughout the year, helps with the flexibility needed to deal with business life in general, and start-ups in particular.

 

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