So, you’ve got a great idea for a start-up? Here’s why shareholder agreements can be pivotal to your success.

What is a Shareholders’ Agreement?

A shareholders’ agreement, also referred to as a stockholders’ agreement, is a private legal document outlining how the company should be operated as well as the rights and responsibilities of the shareholders.

Shareholder’s agreements typically include regulation of the following matters:

• Provisions for future shareholder disputes
• Management of the company including elections for board of directors
• Protection for competitive interest
• Lockdown provisions

Benefits of Creating a Shareholders Agreement

Shareholders’ agreements are designed to established provisions so that shareholders’ rights are protected, and they are treated fairly. Protections for both minor and majority shareholders can be outlined within these agreements. For minor shareholders, these agreements can require certain decisions be allowable through a unanimous vote. Contrastingly, majority shareholders can include “drag along” provisions which prevent minority shareholders from sinking a deal. Creating a shareholders’ agreement also demonstrates stability to potential investors, banks or other creditors. By creating this type of agreement, it shows you have planned for the possibility of future disputes.