Starting a new business is not easy, and with today’s economy, you may be seeking financial help wherever you can find it. Many entrepreneurs find that obtaining shareholder investments in the business is an easy way to raise the money they need. You may have a closely held business, which only allows a limited number of shareholders, mostly family, or you may open your shares to the public by complying with certain federal regulations.
In either case, you will be dealing with investors in your company who also have a certain amount of influence on the operations and direction of the business. After all, it is their money that is funding the venture. They also receive a portion of the business profits, and they might lose money if the company does poorly. Because there are so many variables with shareholders involved, having a shareholder agreement is an essential safeguard for your business.
What your investors need to know
Shares in a business are regulated by the Securities and Exchange Commission. If you plan to make stock in your company available to the public, you should be certain you are well-versed in federal and Georgia laws concerning securities. Additionally, your shareholder agreement will fall under SEC regulations, so you will want to seek legal advice about how to comply with those laws. Your shareholders agreement will be a vital tool for ensuring your investors’ rights are protected and defining your relationship with your investors.
While every agreement may have its unique elements, most shareholder contracts seek to achieve the following goals:
- The role of the board of directors, including how the board will elect members and replace members who leave
- The decision-making process of the board, including which decisions will need a vote and whether a two-thirds majority is necessary
- Who can buy and sell shares and how shares will transfer, such as if a shareholder dies
- How often shareholders can expect to meet for reports and updates
- Consequences for shareholders who violate the terms of the agreement
- How the shareholders will make decisions about whether to file for bankruptcy, change the direction of the company or dissolve the business
As you can see, a shareholder agreement can place a great deal of power in the hands of your investors, but you also want to make sure your shareholders do not hinder the progress and potential of your business. While it may seem tedious to consider these and many other situations you and your shareholders may face, having an agreement in place may facilitate those decisions and allow you to continue focusing on the success of your business.