Starting a business? The one key legal document you should have.
When starting a business, every business owner has to prioritise his or her start-up expenses. We understand that this extends to legal expenses.
One of the main objectives in putting place recommended contracts and other legal documents is to mitigate risk, including:
minimising the prospect of a future dispute
limiting liability to customers
avoiding unpleasant traps, such as being unwittingly locked into unfavourable supplier terms
In terms of the types of contracts a new business owner should have in place, Google can help you work out what you didn’t know and inform you as to what contracts you need. However, it is the particular content of those contracts that a business owner knows they need that can be the unknown factor. And that’s where a good lawyer will help.
For example, often business partners who come together to start a new enterprise know how they want to remunerate and incentive each participant and what each person is required to bring to the table in terms of deliverables. However, this mightn’t necessarily fit into a neat legal box and some lateral or innovative thinking on the lawyer’s part may be required to come up with an option that will both achieve the commercial imperative and give it legal efficacy, without other unintended consequences.
In our experience the number one document new business owners (who are not sole owners) should have is a shareholders agreement (or equivalent agreement, depending upon your structure, such as a unitholders agreement or partnership agreement).
Why? Our answer is that it will help mitigate the risk of a dispute with your major asset in the start-up phase, your partners. For example:
what happens if the business needs more money sooner than expected and one owner can provide this but the other(s) aren’t in a position to do so? Should the others’ ownership percentage be diluted? If external funding is to be sought and one owner can provide security but not the others, how is the security provider to be protected in the event that the security is enforced against.
what if one of the ‘sweat equity’ partners has a change of heart after a year and wants out? Protection against an unknown third party becoming a shareholder should be considered.
The process for the client in drafting the shareholders agreement also helps them to obtain clarity on what the timeframe is for realising the value they have created. How do the shareholders wish to deal with sale events or where one shareholder wishes to exit early?
We’d love to help
If you would like to know more, please feel free to get in touch. We are happy to have a preliminary, no obligation, no cost, telephone call with you to provide some initial guidance to help clarify structures, agreements and the legal costs involved in taking the next steps to protect you and your business.