Technology Law Experts
The Practical Tech Lawyer: The Value of a Shareholders’ Agreement
Everybody likes to save money, right? And nobody enjoys paying a lawyer hundreds of dollars an hour for something that you can probably find on-line. It’s not hard to use the Internet to form a corporation or a limited liability company in any state, often for less than the cost of hiring a lawyer to do it. But you always get what you pay for.
If your company has more than one owner, you need to think seriously about taking one more step: creating a shareholders’ agreement (which goes by other names too, such as a “buy-sell” agreement or an “investors’ rights” agreement) for your corporation, and making sure you have an operating agreement for your LLC. These aren’t available from the legal form websites, because they require some custom work from a lawyer. So, yes, it will add to the cost of forming the company.
Without a shareholders’ agreement (for a corporation) or an operating agreement (for an LLC), you will be a the mercy of your local state’s default rules if and when any of the following situations, among others, arises:
· One of the owners wants to sell or give away stock. Do you want to agree in advance on any restrictions? Should the other owners or the company have a right of first refusal to buy the stock first?
· One of the owners dies, becomes disabled, gets divorced, quits the company, or gets fired. What should happen to his stock in each of those situations? Who will serve on the board of directors?
· If an owner is going to be bought out, how will that be paid for? Over time using debt? With insurance purchased by the company? How do you value the stock when this happens?
· Do want any special voting rights? For example, can one person require the others to approve a sale of the business? Or conversely, are there decisions that should require more than a simple majority to approve? Do you want to agree on who will serve on the board of directors, regardless of stock ownership?
A friend of mine is fond of saying, “Whenever three guys form a company together, it’s only a matter of time before two of them gang up on the other one.” It happens all the time. Is one of your co-founders tired of working long hours like everybody else? Are your partners making crucial decisions without consulting you anymore? Do you like the idea of giving a board seat to your deceased co-founder’s children? Or her ex-husband?
Get a shareholders’ agreement.
© 2013 by Robert G. Schwartz, Jr. All rights reserved
Disclaimer: This summary is provided for educational and informational purposes only and is not legal advice. Any specific questions about these topics should be directed to an attorney.