Michael Buckworth returned to Leathermarket’s Club Workspace venue to deliver his second seminar on StartUp and Small Business Law on Monday 12th December.
Michael, who is a great ambassador for his firm ‘Buckworth Solicitors’, believes that by empowering the SME community with legal knowledge, he better equips them for survival on London’s entrepreneurial front-line.
Michael has previously given a talk at Club Workspace that explained the law surrounding Freelancers and Interns. Following the huge success of this presentation, Michael has decided to make these events a regular thing. For more details on future dates, keep tabs on Dreamstake!
On Monday, Michael’s subject of discussion was ‘Shareholders’ Agreements’
Michael opened by explaining why Shareholders’ Agreements are one of the most important legal documents for a small business to get right. Or, perhaps more importantly, why they can be a particularly damaging document to get wrong. This is because Shareholders’ Agreements dictate the following in law:
- How much control different parties have over an organisation.
- How employees are incentivised.
- The exit strategies from the organisation for shareholders.
In terms of the ‘Control’ of your organisation, Michael pointed out that Shareholders have the right to appoint Directors. However, these rights are not the same for every shareholder and for ever company. This is because the right to Directorial appointment are decided in your Shareholders’ Agreement. Different ways in which these rights of control manifest are listed below:
- Your SA could dictate that a certain shareholder, or certain shareholders, have the right to automatically appoint a Director to the company’s board.
- Your SA could dictate that when a shareholder owns a certain percentage of share they have the right to appoint a Director.
- You can stipulate in your SA that certain kinds of decision (such as administration!) have to be unanimous.
- Your SA can stipulate that certain kinds of decision have to be passed by a percentage vote.
In terms of controlling your business, if you are looking for VC investment it is advisable to ask a solicitor to review your Shareholders’ Agreement, as you don’t want to give a VC more control than they are entitled to.
One idea could be to split your organisation in two: a Holding Company and an Operating Company. The Operating Company is the organisation that you offer to investors, whilst the holding company has the legal ownership of your Intellectual Property. Therefore, you can set off on an investment run safe in the knowledge that your IP won’t slip out of your fingers.
If you want to set up this two-company system, definitely seek the advice of a solicitor. If this two-way-split is executed incorrectly you could end up in a situation whereby if your operating company goes under your holding co - and your legal right to your IP - goes with it!
If you plan to incentivise employees, or freelancers who work for your business, by offering them shares, Michael suggests that your remember the golden rule: keep your incentivisation structure simple.
Michael advises that small business owners remember that there are other ways by which they can incentivise their employees or temporary staff. One simple way is to pay them a sensible wage, salary or consultancy fee! If people are happy with their pay-cheque that should be incentive enough.
Another option is to pay them a simple cash bonus. This does not compromise the ownership of your business and will still serve to incentivise the bonus-receiver.
If you would prefer to incentivise through shares, here are the some methods and approaches that Michael advises:
- You can give employees or freelancers a profit share - rather than an equity share.
- You can give them an equity share. In other words, give them a certain amount of shares in your company, or give them ‘share options.’
- Michael’s Advice: Keep your classes of share simple. As a small business it is unlikely that you’ll need type A, B and C shares.
- If you contractually incentivise tech developers (for example) to build you some software, you must ensure that there is a clear legal definition of what the ‘finished product’ is. Otherwise you could end up giving away a share of your business to a person who has supplied you with a dud, ineffective or incomplete software solution.
Michael was quick to admit that it is counter-intuitive to consider your exit strategy when your small business is in its startup phase! Be assured: Considering exit strategy at the beginning of your business’ life is of the utmost importance.
Michael explained that there are 3 main ways by which you can exit your business.
- Sell your shareholding
- Sell all of your company
After outlining the trio of exit routes, Michael discussed the terms that you can have written into your Shareholders’ Agreement.
- Something that your SA can stipulate is that you get first refusal of your business-partner’s shares if he or she decides to sell.
- This is known as ‘Preemption Rights’.
- Putting Preemption Rights in place is a great safeguarding mechanism. In the case of your business partner leaving on inclement terms - becoming a ‘bad leaver’ - he/she cannot sell their share to a rival, or to someone you simply don’t like, without offering to sell to you first.
- Drag and Tag is another protection method.
- Enforcing ‘Drag and Tag’ means that your business is protected against a large investor freezing out minority shareholders.
- Drag and Tag can stipulate something along these lines: If someone amasses a 90% shareholding they are obliged to offer to buy the remaining 10%.
Right. Believe it or not, that is the end of Michael Buckworth’s extremely valuable advise!
I think you’ll agree that Mr B deserves a hearty pat-on-the-back for sharing such beneficial information. And he deserves another (please think of the poor man’s vertebrae) for providing every attendee with something fizzy to drink & boxes of most welcome mince-pies.
Thanks also to Paul of Dreamstake for hosting the event, and thank you to everyone who attended for being so complimentary about the Club Workspace venue. If anyone’s interested interested in becoming part of the Club Workspace community, take a look at this and have a watch of this! If you want any more info please get in touch via the @clubworkspace Twitter feed or pop into the Club Workspace venues at Leathermarket or Clerkenwell Workshops anytime, and there’ll be someone to show you around.