Shareholder and Employment Agreements – Guaranteed Disaster If Not Executed When Forming Your Business

We all know the scenario. You may even have been, are there now or could find yourself there in the future.

Two or more seemingly intelligent people decide to go into business together. They discuss their business plan, have a beer or two and talk about their future success and money they will make. Convinced, everyone shakes hands, rolls up their sleeves and sets out to make it happen.

A corporation is formed, a to do list is started, a bank account is opened, cell phones and business cards are ordered and the ideas and relationship have now moved into uncharted waters for most business partnerships. The “courting” is over and the owners, directors, officers now find themselves “married”.

The relationship has changed, knowingly or not, into one bound by moral, legal and civil responsibilities and obligations. Over time, stresses created by new found managerial responsibilities, time constraints, time commitments, differences of opinions regarding people and processes start to surface. Personality quirks, perceived or real shortcomings, unrealistic expectations, vices, personal financial or family problems, poor communication and listening issues surface and the drama begins. Our humanness manifest itself and we may begin thinking judgmental and self-righteous thoughts toward our partners.

Interestingly enough, it doesn’t matter if the company is making good money or just getting by, Roles Change, People Change and Relationships Change.

One day something ticks, and I can tell you from experience it’s usually about something deemed unfair by one party regarding his or her ROI of their time, efforts and money invested, possible even a cash call and the “I can’t take this anymore” mindset surfaces and just like in marriage, people want out.

I was recently helping a client with a partnership issue and shared with him this realism “nothing reveals a partner’s intentions, commitment and character like a cash call”. Money and how one relates to one’s self-worth and importance has been the death of many a partnership and relationship.

So what’s the solution? Employment and Shareholder Agreements, prepared by an attorney that specializes in Business Law in the State of Incorporation and executed by all partners or shareholders of the business at the time the business is formed and incorporated. I want to be perfectly clear that I am not an Attorney nor am I providing legal advice. What I am providing; however, is sound business advice that may save you tons of money, heartache, brain damage and relationships in the future. The following items are for thought and discussion with your business associates and your Attorney.

I have intimate knowledge of the importance of such agreements in that having them in place has saved me millions of dollars in a couple of my businesses. Likewise – I have been irresponsible in two instances and been blinded by the seemingly moral character of the players involved and perceived comfort of the relationship and foolishly foregone the agreements. I later lost and wrote off hundreds of thousands of dollars due to my negligence. I do take full responsibility for this lapse of judgment on my part and offer these “scars” as proof to you of the importance of sound agreements no matter who your partners are or how well you think you know them.

Employment and Shareholder Agreements, sometimes referred to as Operating Agreements, are legally binding documents that supplement the Articles of Incorporation by defining and quantifying in specific enforceable language items such as:

  • Rights and responsibilities of each partner / stockholder
  • Clarification of ownership percentage of each party
  • Meeting rules and voting rights of each party
  • Management structure of the business
  • Define Board of Directors and Officers
  • State duties of each partner / shareholder including defining the percentage of time to be devoted working for the business and the location of where their office will be situated
  • Compensation package and annual leave policies
  • Profit and Loss distribution provisions
  • Stock Transfer or Disposition of Shares provisions
  • Buy Sell Options, Events, Triggers and Terms
  • Deadlock provisions for Buy Sell event
  • Death and Disability provisions / responsibilities
  • Key Man and Death and Disability Insurance requirements
  • Involuntary and Voluntary Termination terms and event triggers
  • Severability
  • Venue, Notices, etc.

In the haste to get to work, build a backlog and make money many partnerships don’t devote the time, energy and resources to get these important agreements in place. The list looks long and daunting and is easily pushed aside with sound intentions to get to it later. I can tell you from experience, later will come and whether you are experiencing business success, stagnation or the possibility of failure, the discussions and agreements are much harder, if not impossible, to create and execute in the cloud of uncertainty, confusion and possibly distrust.

Again, let me stress I am not an Attorney and offer this list solely to spur intelligent and responsible discussions with your partners and legal counsel.

As Trusted Advisors, The FlatRock Group has examples of agreements and Legal Advisors to help our clients through this process. Getting the agreements in place from day one will allow you to focus on growing and leading your business to success with the confidence of knowing this one less issue that you will have to address in the future to protect every party’s rights, rewards and most importantly relationships.

At The FlatRock Group we help companies succeed by helping them understand why many contractors fail.  Call us today and let’s discuss area in your company that you would like to improve for growth and success.

Click this link for a pdf of this article   The Importance of Partnership Agreements

 

Kent Leighton        kent@flatrockgroup.com       830-201-0678

 WWW.FLATROCKGROUP.COM

© 2015 The FlatRock Group All Rights Reserved

 

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About the author

Kent Leighton, Founder of The Flat Rock Group, has more than 40 years of experience in the Construction and Development Industry. Having owned a successful midsize General Contracting firm he understands the opportunities and trials of running a successful business enterprise. His passion is sharing his victories and his scars with leaders and managers to help them grow and prosper.