Four Mistakes to Avoid When Drafting a Shareholder Agreement for a New Business
Are you starting a business in the Bay Area? If you intend to form a corporation with multiple shareholders, may need a shareholder agreement. Broadly defined, a shareholder agreement is a contract that governs the rights and responsibilities of the shareholders and the corporation. A well-drafted shareholder agreement can reduce the risk of disputes and protect your rights/interests if one does arise. Many entrepreneurs make mistakes when drafting their shareholder agreements. In this article, you will find an overview of four common errors to avoid when writing a shareholder agreement for your company.
Relying Entirely on a Contract Template for a Shareholder Agreement
Although there are more off-the-shelf contract templates available than ever before, relying on a standard template for a shareholder agreement is almost invariably a major mistake. A shareholder agreement is critically important. It defines the core rights and responsibilities of the parties to a business. Using a template without customizing it to fit the specific needs of your California business can lead to serious legal problems down the road.
Drafting Vague Provisions (Do Not Assume Everyone is on the Same Page)
When drafting a shareholder agreement, it is important to be clear and specific about the rights and obligations of the shareholders. Vague provisions can be open to interpretation, which can lead to misunderstandings and disputes. For example, if a provision is unclear about how profits will be distributed among the shareholders, it can lead to disagreements about who is entitled to what share of the profits. The language must be precise. Do not assume everyone is on the same page.
Overlooking Transition Planning (Especially Important for Closely-Held Corporations)
Transition planning is critically important for new business—especially so for closely-held corporations. You may want to include buy-sell provisions as part of a shareholder agreement. Buy-sell provisions define how a shareholder’s shares will be disposed of if the shareholder dies or wants to leave the business.
Not Including Terms Related to Dispute Resolution
Starting a new business is exciting. The last thing that most people want to think about is the risk of a future internal dispute. At the same time. a shareholder agreement is supposed to protect you—and your business—in the event that a legal dispute arises. It is important to consider your options for dispute resolution as part of the shareholder agreement. You may want to consider including terms that mandate alternative dispute resolution (ADR), such as business mediation or business arbitration.
Get Help From Our Bay Area Shareholder Agreement Attorneys Today
At Coepio Legal, our California business lawyers have extensive experience helping entrepreneurs start up companies. If you have any questions about the drafting or negotiation of a shareholder agreement, we can help. Contact us today for a confidential consultation. We provide business law services throughout the San Francisco Bay Area.
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