Do you need an Agreement with your Shareholders?

28 January 2023

It Takes Two to Tango

When Business Partners can’t see eye to eye, it may be best to part ways. A Shareholders’ agreement is your insurance cover in such situations…

When Good Partnerships Go Bad…

Fallouts between Partners can take your hard work and venture down with them. We recommend signing a Shareholders’ agreement to protect your interests is such situations

Do you need a Shareholders’ Agreement?

A shareholders’ agreement (SHA) is your best fall-back option in case your business partnership goes bad. Read on to know why and how….

The equity battle that Arunabh Kumar and Prashant Raj (of TVF Pitchers fame) are currently embroiled in, throws light on a very important issue in the startup ecosystem – the Falling out of Business Partners. While a partnership has a 30% better chance of survival (as against sole proprietorships), they also have a failure rate of over 50% (!)

While there is little you can do to salvage a failing partnership, when incorporating a company, we recommend signing a comprehensive Shareholders’ Agreement (SHA) in the first phase of your  startup story to protect your rights as well as your business. A crystal clear SHA is the bible of your relationship with your co-founders.

Here are 3 things you need to know about SHA

What is a SHA?

Simply put, it’s a contract:

  1. Who are the people who are the shareholders?
  2. How and who will operate the company?
  3. What are the shareholders' rights and obligations?

And what it’s not…

What does it do?

  1. Management of the Company: It outlines how the Company will be managed and operated – roles, responsibilities, decision making.
  2. Rights & Duties: It creates a legal binding on every member with regards to their rights and responsibilities towards the Company and other shareholders.
  3. Exit of Shareholders: It directs how a member may leave the company and what privileges or obligations he will have.
  4. Safeguards: It binds the current and exiting members through clauses on IPR, Confidentiality and Non Compete Clause to protect the Company and its Business

Is it enforceable on a new member?

No. A new shareholder is not bound by the SHA solely by the virtue of joining the company. He or She has to sign and accept the SHA (become party to the Agreement) and only then are its terms and conditions enforceable on the new shareholder.

Better Safe Than Sorry

A shotgun investment firm called Argosy Partners cashed in on the Partnership Fallout saga with the very innovative ‘I hate my partner’ campaign (Check it out here). A well-documented SHA  ives a clear view of how the company will function, ensures lesser hassle if there is a fall-out and most importantly, protects the business from going down with the partnership.

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