Business with family/friends

My brother and I each hold 40 per cent of shares in the new company, with the remainder of the equity held by a family friend, who provided initial funding. We have trademarked the business name and just signed the lease on our new premises. The investor has asked to see a draft shareholders’ agreement. My brother thinks we don’t need one, as we are unlikely to fall out. Can you advise?

Starting a business with family or friends does not negate the need for formal arrangements. Such relationships have been tested by the daily strain of running a business together. The closer of the family tie or friendship, the wiser it is to have an agreement. Put it in a drawer, and hopefully never bring it out, but having it there. Life is too short for arguments could be avoided.

A shareholders’ agreement codifies your business relationship and should prevent the manipulation of personal relationships, if relations subsequently deteriorate.

A shareholders’ agreement regulates the relationship between the company and its shareholders, between majority and minority shareholders, and those shareholders working full time in the business and those taking a more passive role.

As well as dealing with issues such as who has the right to sit on the board, dividend policy, consent matters, etc, the shareholder agreement should also include restrictive covenants (providing protection for the business if a shareholder departs). The company may have been launched in a blaze of optimism but you should consider what might happen in the future. For example, which of the shareholders is on standby to provide any additional funding if the bank stops lending?

How might the deadlock be broken if the shareholders fall out? These questions, and many more, should be posed to the participants before the business is launched. The negotiation of the shareholders’ agreement provides an excellent opportunity to make sure everybody is on the same page as you consider taking your business to the next stage.

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