Starting a business with family or friends?

• Do you have to agree on everything?

  You will each bring your specialist skills to the company. Are you each empowered to make day-to-day decisions independently with only larger decisions being made jointly or should all decisions be made jointly (this may depend on how young your company is)?

  

• What happens if you fall out?

  Unfortunately, things don’t always go according to plan and the person that you thought you could work with turns into someone that you can’t bear to be in the same room as. How do you manage this? If one of you wants to exit, you can agree to buy the other person out but what if you both want to stay in the company? Do you want to have to go through mediation to try and resolve your problems? Should there be a mechanism whereby one of you buys the other out (a Russian Roulette type clause)? Should the company cease to operate and be liquidated?

• What happens if the business grows?

  This is a good thing! Your business is successful and its growing. But what happens next? Do you want to bring more directors on to the board, do you want to bring in additional investment (more shareholders), do you want to put in place an option scheme to incentivise employees? You don’t need to know the answers to these questions now but you need to know how you will answer them if the time comes. Can you only take these actions if you both agree? Do you want to entrench your position as founders so that you have protected rights as regards anyone else who participates in the company?

• What happens if someone dies?

  Most of us have in place a will setting out what happens to our assets on death (and if you haven’t then you should do!). What does that will say about the shares in your company and does it match the position you agree with your business partner? If you die while still holding shares in the company, do you want your beneficiaries to inherit those shares or do you want them to be able to cash out or a mixture? If the shares are staying with the beneficiary of the will, do you want to control who that can be? As the remaining shareholder, do you want to have some of those shares to offer to a new shareholder who you might need to assist you with the future operations of the company? If the deceased shareholder’s shares are going to be bought, how are you going to do that? Will the company buy them back (if it can legally do so) or will the remaining shareholder buy them back (if they can afford it)? Have you considered getting life insurance (to benefit either the company or the remaining shareholder) to fund the purchase of shares on the death of a shareholder.

• What happens if someone wants to leave?

  You have worked together well but one of you has decided that they want to take a step back from the company. How do you manage them leaving? Are they entitled to take some cash out when they leave? If yes, how are you going to fund that? Will the company buy back the shares or will the other shareholder buy the shares? Can the departing shareholder hold on to some shares? Is that appropriate? Is it right that they can benefit from the future growth of the company? If they are retaining shares, should the value that they can benefit from on a potential exit be capped at that point?

• What happens if someone behaves inappropriately?

  One of you has behaved inappropriately and damaged the reputation of the company and has been sacked as an employee (a ‘bad leaver’). Should that leaving shareholder have to sell their shares – do you want them to benefit from the future growth of the company? Should they get fair value for the shares if they sell them or should they receive a lower amount?

• What happens if you get divorced?

  The answer to this question may depend on whether your partner is holding shares for tax planning purposes or whether they are an active part of the business. If they are active in the business, you should refer to the section above as to what you do if you fall out because a divorce suggests that you may not be in a position to continue working together. If your partner is not an active member of the business and they are holding shares for tax planning purposes, what should happen to those shares on a divorce? Are you happy for both of you to remain as shareholders or should the shares of the non-active member be bought at fair market value? Those shares are likely to form part of any divorce settlement but if you have discussed and agreed how you want to manage this before you get divorced then this can help you make decisions during the divorce process.

Conclusion

Discussing these matters will require difficult and honest conversations but the time to have these conversations is when the business is going well and everyone is getting along. Trying to agree how you are going to manage things when a major life event has taken place or you have fallen out can result in challenging discussions which can impact your business and result in increased legal fees.

Shareholders’ agreements aren’t cookie-cutter documents; MIL can support you during these discussions and help you put in place an agreement that is right for your company.