When people think of a “prenup”, they think of a contract entered into by individuals intending to marry, and addresses what will happen in the event of a divorce or a breakup of marriage. However, business partners starting up a new business together should also consider entering into a prenup, otherwise known as a shareholders’ agreement.
A shareholders’ agreement can spell out what will happen to the business should the partnership breaks up. It will also outline the various rights and obligations available to all shareholders. At a minimum, such agreements will set out what happens if one shareholder dies or is unable to work, and what happens should one shareholder wishes to exit the business, while the other shareholders do not.
Just like individuals about to get married, individuals starting a business together may not wish to enter into a shareholders’ agreement. Such entrepreneurs want to focus on creating a successful business, as opposed to focusing on its demise. As well, individuals who have already worked together may feel that a handshake is enough, and that negotiating a shareholders’ agreement is an indication of a lack of trust by one partner towards the other. However, it is important for all businesses, regardless of its size, to have a shareholders’ agreement in place. It is easier to resolve any potential disputes when there is already a mechanism to deal with the problem, then to try to resolve it after it has already escalated.
Source: The Globe and Mail – A Prenup can Spare the Hollywood Drama
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