Another really good TechLaw4Startups event!
The premise for this event was that companies are formed by people who are “the best of friends” but that you still need to consider what happens if things don’t go well or you fall out…
The key advice was to plan for “what ifs” such as if your co-founders or partners…
- Suffer death or illness
- Are declared bankrupt
- Want or need to sell shares
- Set up in competition
- Can’t (or won’t) come to meetings, blockingdecisions
- Disagreement amongst directors
- Make money (dividend policy etc)
The basic tools for dealing with these problems in advance are the articles of association (every company has public articles filed at companies house – they form it’s constitution) or a separate shareholder agreement between the relevant parties (which is a private contract).
Shareholders agreements can cost a couple of thousand pounds to draw up and will usually be superceded by an investors agreement for companies that raise capital externally. For many startups, modifying the articles is a more practical proposition.
Some of the key measures that should be included in articles (but are NOT in most standard articles) are:
- Pre-emption rights
- Ensure that company/existing shareholders have first refusal on any shares to be transferred/sold
- Compulsory Transfer
- People leaving the company may be compelled to transfer shares to the company (for nothing or for a specified sum)
- Drag: On sale, a majority (e.g. 90%) of shareholders can force a minority to sell
- Tag: On sale, a minority (e.g. 10%) of shareholders can insist on getting the same deal as the majority
Of course, there was a lot more to the evening than these quick highlights, and some of the most interesting parts came from hearing other peoples experiences. I’d highly recommend this event to anyone involved in running a startup!
Thanks as always to Dug Campbell for organising, and MBM Commercial for hosting.