We frequently see shareholder disputes, particularly in companies started amongst friends, or where the idea or reason for starting the company is in its infancy.
It is very easy at an early stage to neglect setting up the relationship properly, and that is what can lead to disputes.
Sometimes intentions are not properly recorded in documents, or even emails or texts in many cases, because the time required or (more importantly) the costs required are higher than the startup would like.
The importance of properly setting up a business relationship early on can not be emphasised enough.
The cost of not doing it can far outweigh the cost of doing it early.
What to consider asap
You need to know your team, your company, its aim and what each person is bringing to the table. It is vital to understand how the relationship needs to work, and a lawyer will then translate that into a document for you.
Here are some things to think about when deciding how to organise the relationship:
- Who is going to be a part of the company? Shareholders, Directors, Secretary?
- What is each of those people bringing to the table?
- What is the idea you are creating?
- Does it need protecting?
- Do you need a Non-Disclosure Agreement for each person?
- What happens if someone leaves the company?
- What happens if someone wants to join the company?
- What if someone is not pulling their weight?
- Who is putting in funds and how much?
There is so much more to consider, and one of the team can take you through the questions.
When to get an agreement in place
ASAP. The agreement does not need to be all singing and all dancing; it is better to have something than nothing. Not to say that one contract fits all, but you should have an agreement in place early on and one that ticks all, or if not viable at the start, as many boxes as you can.
If you think of the timeline of a project, it tends to flow like this:
- Idea creation;
- Company & relationship formalities – incorporation and agreement;
- Everyone starts work;
- Some people do different jobs to others;
- Re-organisation of functions or company;
- Agreement / Dispute.
This is a top-line timeline that doesn’t always apply, but it very often does. One step out of these seven can codify relationships and prevent issues at the last stage.
Do the formation and relationship setup early and well.
Do you need something bespoke?
No. Yes. Maybe.
In general terms, it is better to have some kind of agreement than no agreement at all. Do not think that any contract will do, though.
Often enough, a client will want a lightweight agreement early on that covers the core issues, with more important shareholder issues to be resolved by agreement later. If they can’t be resolved later, then the company can generally still function well enough with a proper agreement in place.
Sometimes you want something bespoke and right from the start.
Sometimes it is vital; particularly if the issues are complicated.
Just come and ask one of the team and we can help you with whether you do or not. Early on, the rate of bespoke agreements are very low. They tend to come in by agreement at a much later stage.
You have to take a view on what is needed. We can guide you in that, but bear in mind what you set in stone now will be hard to shift later without agreement or provisions in that contract to do so.
If it is a tough decision as to whether you need something bespoke and more formal, the general answer is that you do. Or, at the least, you should take advice on it.
What to do if you do not have a written agreement – and there is a dispute
Do not panic. First things first: This is just how things are right now, and they can be changed. It is rare there is no leverage in a commercial relationship and rare that nothing can be done.
The chances of success of each of the potential routes to success vary, and we can guide you through them.
The first thing to look at is intention of the parties. If you all meant to agree that none of you, as shareholders, could do X, Y or Z, and if that is recorded in emails or meeting minutes, that will be a good start.
Often we receive agreements and discussions by text. Do not ignore them because they are hard to collect or more informal. Sometimes they are vital.
Oral agreements count. They are harder to prove, but they are still valid agreements. If you can remember agreements in enough detail, we can put them forward as an argument.
Underestimated by many litigation lawyers, negotiation may be the best way forward. Sometimes people are just being difficult, but often they may have a legitimate reason for not wanting to work in the company anymore and retain their shareholding, or to take over the running or to back out by being paid.
The key to a good settlement is understanding what they want, why and how you can help fix it. If it is fixable!
Keep lines of communication open. Not talking will make things sour. As soon as communications become difficult or impossible, come to us and we can engage them for you without the personal attachment.
Settlements are about disappointment management
Finding a solution to a problem is rarely something that benefits someone vastly more than another. Be prepared to back down on some things, if not all of them.
Why all the scaremongering?
When a company reaches a certain value, disputes start to arise. They may be small or they may be ‘make or break’.
Without an agreement in place to rely on, you are making arguments based on historical information and legal analysis. These are difficult and complicated.
For something which could cost £2 – 5,000.00 + VAT to sort out early on, clients can spend this or more arguing later on.
We press people to take advice early and set up relationships properly, not to scare or make money: Doing it the way we advise you to actually saves money later down the line.
How can we help prevent issues?
Strain Keville advises clients in a very personal and pragmatic way. We strongly advise you come to us early to get initial advice, if nothing else. Knowing you should to a, b & c is the first step. Properly informed you can make any decision you like.
Get advice: Not knowing and making a bad decision accidentally is easily avoided.
We have a start up kit, which is reduced in price and means you can have the basics in place early and at a reasonable figure.
We are always available to give initial guidance to all our clients and any new clients who want to speak to us. Just call and we can help, or jump on the messaging system (bottom right!) and someone will be on hand to chat.