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5 misconceptions about shareholder agreements

When you own a business, you must focus on both the short and the long game. Short game: ensuring your profit/loss ratio is heading in the right direction. When it comes to the long game, a business owner needs to think about legally binding contracts, share prices and who will run the company after you are gone.

If you own the company with others, part of your long game may have also included a shareholder agreement. That is not always the case, however. When people come together in shared ownership of a business, it can feel a lot like a marriage: people with a common vision and unique strengths, coming together to increase stability and, therefore, power. Like a prenuptial agreement in a marriage, some business partners feel that a shareholder agreement is only for those who don’t trust each other, or for the businesses with billions of dollars in revenue. That is not the case, however.

Here are 5 misconceptions about shareholder agreements and why theyre wrong:

  • Show Lack of Commitment: Some people believe that business owners who create a shareholder agreement lack commitment for the future. That is simply not the case. Those in a shareholder agreement are very often just as committed to the future, if not more, than those without.
  • Only for Fortune 500: On the contrary, creating a shareholder agreement as soon as possible prevents issues as the company grows.
  • A Bad Omen: While some people feel that talking about worst case scenarios is a bad omen, shareholder agreements gives business owners the chance to speak thoughtfully about their plans and set the tone for their future relationship.
  • Wont Be Necessary: The focus of a shareholder agreement is not only on a doomsday scenario, but can set a code of conduct and expectations going forward. Failure is more likely to come to those who fail to set standards.
  • They Dont Hold Up: If set up by an experienced business law attorney, a shareholder agreement is enforceable by law. The time and money put into this agreement will not be in vain if done properly.

A shareholder agreement sets the stage for success and allows the owners to look to the future with confidence.