Legal lessons: Shareholder Agreements

I had a meeting with a couple of our lawyers yesterday.

Always a bit scary, meeting with the lawyers.  I leave the meeting wondering how many hours I've just been billed. 

We're working with a couple of law firms right now.  Gowlings, headquartered in Ottawa, do our Canadian work, and Orrick out of San Francisco handles our American stuff.  Both excellent firms.  I know some of the Gowlings folks from university days, and Victoria impressed the Orrick judges at San Francisco's HYSTA business plan competition back in December with her winning presentation.  They've been on board ever since.

This time was with the Gowlings people.  We're moved past the basic incorporation stuff and now are talking shareholder agreements, partnership agreements and intellectual property protection.  

Oh -- one thing I've learned about good corporate lawyers: don't delay, get one.  I recommend both the firms that Moniker is working with.     

Shareholders' Agreement.  It's important to get this right, because circumstances change.  Right now, we've got a terrific, smooth-functioning team that runs mostly on common understanding and tacit agreement.  But what if one of us decides to quit?  Or dies?  Or wins the lottery?  A good shareholder agreement imagines the things that can happen, and specifies (in advance) how we'll deal with it if they do, in fact, happen.  It's about setting clear expectations so that we don't get into big fights later about who-said-what and well-I-thought-we-agreed...that sort of thing.  There is a standard template, but a good agreement must be a customized document that every shareholder has thought hard about and deems to be fair and appropriate.

Fairness.  That's a core principle for Moniker.

My executive team and I have been talking around a draft document for a few months now.  It keeps getting post-poned by the urgent to-do's of Moniker's birth, but I know I'll regret it one day if I don't push it through to some final document that we all sign.  The sooner, the better.

I think we're close.  I'm going to send what we've already got to our Gowlings people, let them have a look at it, and talk through any changes they recommend.  Once I've worked those through with my team, we'll get the lawyers to translate it into Greek.

(by which I mean, legalese.)

Now that I've been through the process, I'd say the big three questions that a good agreement needs to tackle are:

1. How big of a share does each shareholder begin with, and how is that share going to change as the business grows and new money (shareholders) comes in?
2. What are the rules about buying/selling shares?  If I want to sell some of my shares to a '3rd party', do the other shareholders have the chance to buy them first?  What happens to shares if somebody leaves Moniker or dies?
3. How do we decide how much shares are worth?  We decided that until we go IPO, we will set a share price at each annual board meeting and that that price will be in effect for the following year.  

If you can work out answers to these three questions that everybody agrees are fair, you've got a solid agreement on which you can build your company.  (I hope.)