Bircham Dyson Bell: The Shareholders Agreement, a tool to help smooth the road ahead
At the elevated pitch the business was described by the enthusiastic founders as ‘the next best thing’, ‘the million pound idea’, ‘the idea which would revolutionise the sector’. Naturally as an Angel Investor you’re going to be excited by this potential business opportunity and investigate it further.
Having conducted due diligence on the business and met the founders of the company again you decide to invest. In a Dragon’s Den manner you negotiate for your equity and a deal is struck.
As a prudent Angel, you would want to ensure a shareholders agreement is entered into between you and the founders of the company.
The Shareholders Agreement – what is it?
Shareholders agreement regulates the relationship between the shareholders in the business. Even if the shareholders get along now, there may be later changes to the business which affect the relationship between them.
As an Angel you should be thinking about how you plan to exit the company before investing into it. An open dialogue is required to agree the exit mechanism in the shareholders agreement. This will provide you with a cord to pull when the right time comes to exit and without the threat of the remaining shareholders pinning you down. The shareholders agreement is that cord.
What should the shareholders agreement contain?
Discussions about the content of the shareholders agreement should be based on hypothetical questions about the company’s future. Lawyers often advise clients to pay particular attention to what happens when the relationship between the shareholders turns sour. Should the shareholders agree to sell the company in its entirety? If so, at what value? By ironing out such uncertainties from the start, the parties will be paving the way for a smooth road ahead.
It is inevitable that certain discussions are going to be awkward (e.g. what happens to the shares belonging to a shareholder who suddenly dies), but having such open and frank dialogue from the outset will save a huge amount of time and money later on because it is already agreed. The last thing you want (or need) is to be involved in legal proceedings and attending court because you have no shareholders agreement and you have to rely upon what was said to each other in the pub!
Remember, the purpose of the shareholder’s agreement is to have all of the shareholders agree from the outset how the company will approach certain matters in the future.
At Bircham Dyson Bell, we have prepared a template shareholders agreement which is populated using a questionnaire. The agreement is balanced and considers the parties involved (e.g. minority and majority shareholders). For further information or assistance in negotiating and/or drafting a shareholders agreement or discussions about our template agreement or for general corporate advice, please contact either Guy Vincent, Partner or Youichi Iisaka, Solicitor at Bircham Dyson Bell LLP on 020 7227 7000.
Find out more
If you are new to angel investing why not attend the UKBAI ‘Introduction to Angel Investing’ course? Hosted by Bircham Dyson Bell on 3rd April, at their office in central London, the day will cover all aspects of angel investing including tax breaks and negotiating a deal. To find out more visit UK Business Angels Institute or contact Carly Hearn.