This is dangerous because many, if not most, entrepreneurs, will start out by investing their time and money. Some may quit their job, take loans from banks, borrow from friends and family and do whatever they need to raise the funds to get their venture started. In other words they take on massive amounts of RISK. Of course not every start-up entrepreneur will need a one, especially during their first few years of business.
As an entrepreneur who launched a start-up, I know that there is never enough money, and legal documents are the last thing on the minds of entrepreneurs when there are advertisers coming at you left and right trying to sell you that key exposure you need for your business to take off.
Moreover, if the business fails what good will a shareholders agreement be anyway? However, I am willing to bet that in planning your business, succeeding was a major part of your plan, right?
The following clauses are examples which involve the mandatory exit of one or more shareholders. At this point going their separate ways is probably best thing for them and the business anyhow because in all likelihood, if a shotgun clause is triggered, they are beyond the point of being reasonable.
When a shotgun clause is triggered, one shareholder will make an offer to the other shareholder to purchase or sell all of his or her shares. The other shareholder can either agree to sell all of the shares on those terms, or may choose instead to purchase all of the shares of the first shareholder for the same price per share.
This is the classic example of where one child cuts the cake, but the other gets first choice of which piece to take. Either way, at the end of the day one shareholder is leaving and one is staying. Shotgun clauses can be drafted to account for multiple shareholders as well. Couple this with a business in need of cash flow, or loans owing to the offering shareholder which could be called, and you have a situation where there really are no other options.
The Call price can also involve a premium on the value of the shares, and the Put price a discount. In theory, the premium or discount should help to keep things fair, or on a more even playing field, but as with anything, manipulation is possible, especially in situations of financial disparity. Some examples include the following:. The ROFR is a mechanism designed to ensure that existing shareholders or whomever the option is granted to have first right to purchase shares of a departing shareholder.
The other shareholders will have the first option to purchase on the same terms, or allow the sale to the third party. As fun as it sounds, a Piggy Back clause is designed to avoid one shareholder being stranded in a company with a new partner which he or she may not desire. This is especially useful in a minority shareholder situation where an incoming controlling shareholder is not someone with whom the minority shareholder wants to be in business with, and for one reason or another there was no right to purchase granted or used by the minority shareholder.
The minority shareholder can therefore exit the business on the same terms as the other shareholder. This enables a majority shareholder or shareholders to take advantage of what they view as a good opportunity to sell their interest and exit the business. This type of clause is very useful for entrepreneurs looking to retire, or at least move on to the next chapter in their business career without losing an opportunity to sell.
That way, even an unwilling shareholder must comply with what they already agreed to at the beginning of the relationship. Some of this may seem harsh, but the fact is if people could be reasonable with one another, there would not likely be much need for such clauses, unfortunately, that is not the case.
With so much at stake, and having risked so much, it only makes sense that every entrepreneur shareholder would budget for and have one completed as soon as more than one shareholder is in the picture.
It will save you money, stress, frustration, time, and quite possibly your business. This article was intended to be a general overview of basic legal concepts, NOT legal advice.
As each situation varies, it is recommended that entrepreneurs seek the advice of a qualified lawyer if needed. Ok, I am convinced: Some examples include the following: Copyright - Garnet Brooks.More...