I have recently been involved in helping a brewery client sort out an amicable separation between the two founders. This raised two interesting points in my mind.
1. How the various roles of the two founders have changed since founding the business four years ago and how the future forecast changes in the business decided one of the founders to look to move out from the business.
2. How many companies say they have agreements regarding shares but on examination find that they are woefully inadequate to deal with the problems of separation.
It is just as well that my brewery client is going through a fairly amicable split!
In setting up a business from the ground up, it's only when the business starts to become successful that issues start to multiply and the initial roles that the founding group of individuals took on in the beginning start to develop or change.
If the business stays small, the roles of founders and other early entrants to the business pretty much stay as is and do not substantially change. They all just get on doing what they always did, but more of it and longer hours.
It is only when the business starts to grow substantially that the early entrants to the business need to seriously think about how their roles are going to change and what they need to do about it.
The chart below shows the type of changes that are needed by the founders as the business grows.
- In the early days most time is spent on the mundane tasks of running the business, heads down, getting on with it; Making beer, Racking, Delivery, Sales, etc. These have to be done, there are few of you in the business, there is no choice.
- As the business expands, your role become less hands on and more the energy behind the scenes making sure things are done, correctly and on time. You are building a team, more time spent in meetings, thinking about finance, working with accountants and lawyers.
- Get through that stage and now all of your time is spent on selling the vision, the dream, thinking ahead to exits, acquisitions etc. You chair meetings. You are developing the future leaders of the business.
But it is interesting, you did not get into this business to sit behind a desk! You were passionate about people, about brewing beer and drinking it, but that was all in the past when you were a younger, carefree person.
But this is the price of success. It is a hard fact that not everyone who got into this business enjoys the role thrust on them as the business grows. They have gone away from doing things to asking others to do them. This leads quite often to the founders deciding that they have done their bit and now want to realise some money, go off and do something else they enjoy doing, much as they did when they started the business in the first place. The cycle repeats.
It’s funny how many entrepreneurs keep going back to start up new businesses again.
This leads us neatly to the second point;
What sort of shareholders agreement do you have for the business? Splits can become very acrimonious, especially with no clarity on shareholding etc.
If your shareholding agreement does not include the following, then you are leaving yourselves open to potential problems;
1. Limit the transfer of shares to certain classes of people.
2. Consider restrictions on shareholders from selling their shares to anyone they want to. e.g.
a. Keep shares in the company
b. Restrict anyone from outside the company acquiring shares
c. Good Leaver/Bad leaver clauses
3. Are there Drag along/Tag along rights
a. If the majority share owner wants to sell, can they insist everyone else has to sell?
b. If someone makes an offer for the company, if it passes the required % then all sell?
4. Rights for Founders to stay as Directors subject to their holding in the business staying above a minimum?
The objective of all of the above is to keep control of the business as it grows and ensure that as founders you do not get diluted or become marginalised out.
Lots of companies can provide good solid shareholders agreements, but the secret is to start at the earliest date with one and not try to get it agreed further down the line when one of the original founders is thinking of leaving.
Do any of the above scenarios resonate with you? Are you thinking about creating a new Shareholders Agreement? Do you realise you have some work to do on updating your existing Shareholders options? Have you got a founding shareholding partner who wants to leave already? If you would like to discuss any of these topics with an impartial third party, our associates can provide insights and help you deal with the associated challenges. For a confidential chat, please get in touch via our contact form.