A strong shareholders agreement early on can prevent strife later and help keep investment prospects strong later on. Consulting a lawyer can help make sure both parties interests are protected, and we’ve tapped Sydney-based lawyer Jonathan Harris of the Harris Freidman Hyde Page law firm for some of his tips on this important document. Jonathan is a business law specialist and with experience with internet and IT business, he’s no stranger in aiding tech startups.
What are some of the key elements of a Shareholders Agreement that a start up should look at?
A Shareholders Agreement can be a complex document. The more Shareholders the morepotential complexity. I believe the following points are key:
- Control – the Directors have to be able to make decisions and progress the Company.There should be enough Directors (3 or 4 max) to enable a reasonable cross section ofdiscussion. The majority Shareholders should control the Board but not to the detriment ofthe minority investors.
- Dilution – no investor wants to be diluted without having an opportunity of maintaining theirpercentage shareholding.
- Drag and Tag Along Clauses - If the management of the Company is harmonious and allShareholders are happy and if the Company’s business is successful, then eventually youwill sell (or receive an offer). Tax wise it is best for the Shareholders to sell their shares inthe Company. The majority need to be able to ‘drag’ the minority Shareholders along if thereis a sale to a third party buyer proposed. Most buyers do not wish to buy a majority only andthen have to deal with an unhappy group of minority Shareholders.
What are the two or three biggest mistakes you see people making with Shareholder Agreements?
- Trying to be too cute with the Intellectual Property of the business. Investors require all IPof the business to be in the Company.
- Trying to lock professional investors into restraints that are impractical and too onerous.
- Not putting enough time or money towards the drafting of a fair and reasonable document that will govern the Company going forward.
To contact Jonathan Harris or the Harris Freidman Hyde Page firm, you can visit their website or email Jonathan directly. The Expert Advice series taps Australian pros in startup and investment related sectors for some of their top tips. If you have a question or would like to lend your expertise, email us.
