Signed Corporate Governance Agreement Made Easy

E sign corporate governance agreement

and with that i wanted to say hello to alex how you doing alex i'm doing great craig thanks for for having me i'm excited to jump in as we go through this put your questions in the chat room in the q a room and with that over to you alex thanks craig so today we're talking about preparing your shareholders agreement uh for equity crowdfunding but we're also going to talk about just general things to keep in mind when setting up your first shareholders agreement and potentially negotiating a shareholders agreement uh during your first round of investment so before we hop in i just want to be very clear i am not a lawyer i run an equity crowdfunding platform but uh i do not have a law degree uh the opinions that i'm sharing here are my own from my own personal experience and while i am making generalized comments these comments may not fit your specific scenario and you should always seek independent professional legal advice when preparing your shareholders agreement okay before we hop in let's talk for a second about why shareholder agreements matter i know oftentimes you know people will start their business and you're focused on running your business and making it happen and taking the time to go through kind of dry legal agreements and documents isn't always at the forefront of your mind but certainly when you go out to seek external investment it's critical to make sure you have a good shareholders agreement in place uh specifically for equity crowdfunding why do you need a shareholders agreement equity crowdfunding allows you to issue shares directly to a large number of smaller investors given that these investors are actually buying shares they will become shareholders and ensuring your shareholders agreement which governs the relationship between your corporation and all of its shareholders including you ensuring that's properly prepared is critical while i'm going to focus in this presentation on optimizing your shareholders agreement for equity crowdfunding as i mentioned already we're going to discuss critical areas of the agreement that require close attention regardless of the number of investors you have so also before we hop in i'm going to do a quick refresher on some of the basics of corporate governance so i'm sure many of you know this already but i wanted to just put it in here to sort of reiterate where the shareholders agreement fits in when it comes to managing your business so corporations are controlled by their shareholders through voting often one vote for one share shareholders vote to select directors who are responsible for the strategic direction and management of the company directors as a group are called the board of directors and are charged with making key leadership and strategic decisions for the company so you've got your shareholders they vote and choose the directors and the directors actually go and run the business uh one of the main responsibilities of directors is the hiring of the ceo who controls the company on a daily basis so you've got your shareholders you've got your board of directors and then your upper management the shareholder agreement decides several key factors regarding this entire relationship including the power split between the shareholders and the directors and how the shareholders can control the corporation through their votes and the power that the directors have and it's essentially a rule book that governs what you can and cannot do while running your company so the shareholders agreement is really important to set up that initial control structure of the business so another thing to note preparing a shareholders agreement can be considerable work and requires professional legal advice even if you have a free template that you use um when it's only yourself and a co-founder when you go out for your first round of large investment you're going to need paid legal advice to help structure that agreement even when working with an equity crowdfunding platform like equivesto where we have a free shareholders agreement template you can use you'll still expect to spend between one and two thousand dollars on legal fees when receiving investment from angels or vcs you can actually expect to spend between 30 and 50 000 the reason why that number is so high is you're actually going to be paying for your lawyer's legal fees and the legal fees of the investors who are coming in uh and the company will not get additional raise funds to cover that so if you're going out to raise a hundred thousand dollars you should expect that you'll need to pay your own legal fees when negotiating the shareholders agreement with the new investors and also the legal fees of the new investors and that's going to come out of your 100 000 that you're raising another point that's important to remember is the rights of each share class um which actually decide the control that they have whether they're common shares preferred shares whether they have voting rights or they have access to potential dividends those rights are not included in the shareholders agreement the rights of shares are actually created in amendments to the articles of incorporation and is done separately even though uh general rights that apply to our all shareholders are included in the shareholders agreement so you need to make sure you also think about creating those share classes and the rights associated with those share classes in amendments to the articles of incorporation separately from your creation of your shareholders agreement okay so before we dive into it i'm going to cover some of the main parts of a shareholders agreement and what you can actually expect to find in there there are essentially six general areas that are included in most shareholders agreements and they are the shareholder details which outlines who are the shareholders how many shares do they each have and you know the role of different shareholders if they're officers like a president or a secretary and how often the shareholders meet uh the director details so who are the directors of the corporation who can select the directors of the corporation and how often the directors meet the control of the corporation so what decision can the directors make what decision can a shareholder make through voting who can sign documents on behalf of the corporation who can hire and fire employees where is the business located what type of business does the corporation do and who keeps track of the accounting and the finances shareholders agreements also govern dealing with shares so can shareholders give their shares to other people like family members or holding companies what happens if a shareholder gets divorced uh because specifically depending on the country um your the shares might be split between the two divorcees and so that the company actually might want to control a situation where they could have a divorce couple each suddenly having control over the business and how and when can a shareholder sell their shares it also governs the sale of the business so what happens if someone wants to buy the business what is the process and how would the business be val evaluated at the time of the sale and it governs legal protections so shareholders agree not to sue the corporation uh confidentiality clauses can shareholders start competing businesses so non-compete clauses and potentially protection for minority minority shareholders who own less than 50 percent to make sure that they are not taken advantage of by majority shareholders so those are sort of six of the most important and largest areas of uh shareholders agreement so let's start with the first one uh and one of the key areas that is important to keep in mind when planning your shareholders agreement shareholder meetings and decision making so in this area some of the key factors are how often do the shareholders meet how uh much notice must be given before a meeting what decisions actually require a shareholder's vote at a shareholders meeting how many shareholders are enough for quorum which is enough people to begin the meeting and vote uh can all classes of shares vote can certain shareholders always choose a board member and do any shareholders hold the right of veto so deciding exactly these controls around shareholders is a critical piece of the shareholders agreement uh this really helps you outline exactly who's involved with the business what sort of decisions are being made at the shareholder level um and who can be all making these decisions if you're a smaller business you probably want to have a lot of decisions being made by the shareholders you want to call meetings pretty frequently and most likely everyone has a vote when you start getting much larger and you have many more shareholders like with equity crowdfunding you probably want to move some of that power away from shareholder meetings you don't want to have to notify 300 people and give them five days uh notice before your meeting and create a zoom link so all 500 people can come just to talk about um you know a decision that maybe could have been made at a a board of directors level so that balance of control between shareholders and directors is quite important also you want to think about if anyone has veto rights often um you know founders will want to give themselves veto rights so that they can ensure that they have the final say uh and if a decision is being made that they don't like they can essentially cancel or veto that decision at the same time creating veto rights can really uh unbalance the situation and will often lead to new investors new lead investors also requesting veto rights so they can make sure that they're comfortable with a decision that the founder is making so you want to make sure you keep in mind who is getting veto rights and and what the risks are of giving them those veto rights so here's an actual excerpt from uh our free template uh of a shareholders agreement and you can see you know exactly what the kind of legal language looks like uh governing shareholder meetings and shareholder approvals so um it's talking about how frequently they're meeting what quorum is uh which in our in this situation is 66 and two-thirds percent of shares with voting rights um and you know how people are allowed to attend the meeting can they attend virtually um and what happens if you don't have enough people there and everything like that and then we're also looking at examples of shareholder approval so in this situation there's minimal uh minimal decisions being made purely by shareholder approval and a lot of the work and approvals required to govern the business have been moved to the board of directors level so you can see here that uh it requires 66 and two-thirds um to vote in favor of something and it governs you know amending or replacing the articles of incorporation material change in the business any closing down of operations any proposal to sell or dispose of uh substantially a large portion of the assets of the corporation any change to the auditor and any change to the number of directors and if there are going to be any new shares issued excluding five percent of the outstanding shares annually which can be issued uh potentially for you know employee grants so now that we've talked about the critical area of shareholder decision making another really important thing to keep in mind regarding share uh shareholder agreements is directors how many directors are there who gets to pick them how often do they meet what decisions can they make and do any directors have veto rights one important thing to keep in mind because of the governance structure of a corporation uh is the balance of power and shifting that from shareholders to board members if you're the founder of a company and you own eighty percent of the shares if everything goes to a shareholder vote and it's one vote for one share it will always be whatever you say goes because you control obviously 80 of the votes if you have a board of directors with three individuals of which you are one of them suddenly now even though you hold 80 percent of the shares you only have one-third of the vote one-third of the control at the board level so when deciding which either the shareholders or the directors is controlling the decisions you're essentially deciding which individuals will have as much power and control and say when making those decisions which is why people often include veto rights for certain shareholders but moving the decisions from the shareholders to the directors makes it much easier when you have many shareholders to respond quickly to issues and govern the business in a rapid standpoint it also potentially removes some of the control from the larger shareholders and founding members while that's something that many of the founding members might not appreciate because they want to make sure you know it's their business and what they say goes that can also have a positive impact if the other directors are chosen well because that can help put uh sort of safety measures in place to help ensure that the business is making the right decisions and there are people who can stop the founder in case you know the founder loses their mind and does something sort of crazy it gives a little bit of insight and assistance to the founder with that decision making so we highly encourage um boards of between three and seven uh always with an uneven number of members and we think it's good to have more than just the founders on the board of a company so here again are some excerpts of actually what uh section from our template shareholders agreement would look like regarding board approvals so as you can see a lot of the decision decision making power has been moved from the shareholders to the board uh and they're able to choose the salary benefits and bonus uh for you know different individuals of the corporation they're able to hire and fire different employees they're able to authorize the purchase of assets from third parties uh they're able to approve going out to get loans or giving loans getting a mortgage they're able to incorporate a subsidiary they're able to enter into a transaction with another shareholder potentially they approve and declare any dividends and they can also take out potentially life insurance policies on directors of the corporation we also included an excerpt which talk about directors meetings how often they are and uh what timing needs to be provided before they can take place and everything like that so um definitely directors meetings would happen much more frequently than shareholders meetings and with equity crowdfunding it's important to move some of that control over to the board and have the board meeting frequently working well together as a board and with the ceo to ensure that the business is functioning well and able to respond quickly to any potential issues so as i mentioned it's really a split between a sort of traditional control setup and a setup that we would recommend for equity crowdfunding so traditionally it's a pretty even split in the decisions between the board and shareholder vote uh shareholders because there's fewer of them might meet more frequently and all shares are invited to vote because generally they'll all have voting rights with equity crowdfunding if you're bringing in hundreds or even thousands of new investors we recommend moving more control to the board sort of like it would be in almost a public company with shareholder meetings minimized and a lot more control given to the board that just can make it a lot easier for you as a founder to actually manage and control your business without having to wait and frequently call meetings that would potentially involve some of your new shareholders a next core piece of uh shareholders agreements that will be potentially modified when doing equity crowdfunding are the rules governing the sale of shares so often when you have a small company there are very strict rules around uh selling of shares and requirements that must be met before the shares can actually be sold so for all private businesses there are actual legal restrictions around the ability for individuals to resell shares so right now there is essentially no legal secondary market for the shares of private corporations you can't go to like a stock market like the tsx and you know find someone who wants to buy the shares in your private company they can actually only be sold specifically uh when meeting the requirements of the business and also of the government to make sure that only individuals who understand you know what's actually going on and the risks are actually able to buy those shares often the shareholders agreement also adds controls around how shares are sold to protect the business you know even if you have a situation with a shareholder who's invested in your business that isn't going well rather than them turning around and selling their shares to whomever they like it's probably better for you as a business to be involved in that process and potentially even buy back the shares directly from that shareholder so you're able to keep control of the business uh with shareholders that you have approved of so that's definitely something to keep in mind with equity crowdfunding potentially lessening the requirements uh around certain share classes being sold could make it easier in the future when they might be a secondary market for shareholders to have some liquidity and sell their shares but i would recommend this only for uh potentially non-voting shares or a share class that you've sort of assigned to equity crowdfunding another critical piece of shareholders agreements that needs to be modified and kept in mind when doing equity crowdfunding is the pieces in place to protect minority shareholders so when you start the business and you're the core founder with eighty percent of the shares you're able to essentially do whatever you'd like to do when controlling your business however because there are individuals who have also invested who control only twenty percent of the business they're essentially investing to support the business but are at your mercy they even in a straight vote will be totally outvoted by you and won't really have any way to control the decisions that you make as such it's important to include certain rights that protect them so that they can't be taken advantage of by the majority shareholders uh one example of how a majority shareholder could take advantage would be you know a company the the the startup has been in business for about five years uh a large tech player in the space has come forward and and announced an interest in buying the company the majority shareholder could in this sort of situation offer only their shares for purchase so the minority shareholder would get their money out and they would exit but they would leave the minority shareholders still invested in the business this would make it cheaper for the tech company to buy the business they would still have full control but the minority shareholders would be unable to exit and would be stuck still with their shares uh without a potential uh liquidity event so these rights uh that i've outlined here the tagalong and the drag along rights are rights that essentially prevent uh that type of example from taking place so the tag along rights essentially allows minority shareholders the right to participate if the majority shareholder is selling a large portion of their shares so instead of essentially the piece of the company being sold uh from just the majority shareholder all shareholders would have the same ratio of their holdings sold if they so chose which protects them and gives them some additional liquidity also the drag along right uh essentially does a little bit of the opposite so if the majority shareholder is trying to sell the entire business uh and a few minority shareholders are refusing to go long the drag along right essentially enables the majority shareholder to force everyone to sell all of their shares and then the whole company can be sold to new owners so it's important to include both tag along and drag along rights in your shareholders agreement to protect minority shareholders when working with equivesto this is actually a requirement and you can't raise with us if you don't have along and drag along rights inside your shareholders agreement here is exact an example of a tag along and drag along rights that are is directly exerted from our shareholders template so it's rather long and there's a lot of legal references but essentially it's outlining exactly the rights that i just described another area of the shareholders agreement that you might want to modify when doing an equity crowdfunding round is the non-compete clause essentially this clause is in place to protect a small business from one of the shareholders excuse me going out and starting you know a very very similar business that would directly compete using the knowledge they've gained from investing in this business so non-complete clauses make sense when you have a small number of shareholders who all have considerable control when you have a large number of new shareholders without voting rights who aren't involved in the management of the corporation having a non-compete clause can be rather challenging and is also essentially unenforceable so it's a bit easier to simply exempt the micro shareholders with non-voting shares from the non-compete clause another piece of a shareholders agreement that you might want to modify when doing an equity crowdfunding round would be shareholder investment clauses so often to help ensure the liquidity of the business when companies are founded by a limited number of people there's a clause that can be added that essentially requires if the business is going to go bankrupt and needs money uh requiring the existing shareholders to put up the money to keep the business going and if one shareholder isn't able to pay their portion that portion then can become a loan uh actually made by the shareholders who did pay and that loan is owed from the shareholder who was unable to pay so this clause can be very beneficial for you know a small business that's operated by three or four people because you know if you're the one putting up all the money you know that your shareholder will benefit from you putting up the money but you want to there you want a mechanism in place that sort of protects and acknowledges that hey you know you put up that funding to keep the business alive and so this other person owes you however this can also be challenging when you're operating a business in a sort of startup style and you're looking to grow rapidly and seek external investment multiple times in this sort of scenario there's potential depending on how the clause is worded to essentially every time you go out for external investment to force you and the existing shareholders to essentially suddenly now have debts to the corporation so if you go out for one or two different uh external funding rounds you may end up having quite a large debt to your business which can be an unintentional impact from having these clauses in place so unless the clauses are very specifically worded um and they only come into effect at certain times it might be easier to simply remove a clause like this from your shareholders agreement and instead if one shareholder does need to put money in to keep the business afloat that money can be structured as a subordinated loan from the shareholder to the corporation which is to be paid back before any dividends are issued this ensures that you know the person who ponied up the money does get repaid but it avoids creating um essentially loans or debts between any of the existing shareholders another critical amendment uh when preparing craig's laughing another critical amendment to put in when considering equity crowdfunding is removing the requirement to issue share certificates share certificates are essentially a piece of paper that the corporation would issue and would be stamped by the corporate lawyers saying you know this says that this individual has this number of shares this is not required legally and while it does give a clear outline and proof that this person does own shares corporation is also mandated to keep a ledger of all the shareholders and the shares that they they own and when you're going out and getting hundreds or thousands of new investors where potentially shares might be moving hands a bit more in the future you don't want to add a massive legal burden of having to issue share certificates every single time you have a new investor so removing the requirement to issue share certificates from your shareholders agreement making it optional or taking it out entirely is something that we would highly recommend it's totally fine just to record all of your shareholders at least in canada in your shareholder ledger which can be done digitally and it makes everything a lot easier when keeping track of hundreds of new shareholders so a critical piece that needs to be added to a shareholders agreement when doing equity crowdfunding is a jointer agreement so this is how equivesto helps manage the inclusion of new shareholders but it is a simpler way and it is one that we highly recommend so normally in a traditional situation uh for a small business when you go and get new shareholders because the shareholders agreement is a universal or unanimous shareholders agreement all shareholders both new and existing are required to resign the shareholders agreement uh when new shareholders join and whenever there's any amendment that way everyone knows what's going on everyone knows that there's a new shareholder everyone's sort of aware so that makes sense when you're operating a small business with a limited number of shareholders when you're adding hundreds of shareholders at once you don't want to be in a situation where suddenly you need to get new signatures from everyone involved with the business and going forward when you want to seek further investment after an equity crowdfunding round you don't want to need to get the sign off from hundreds of tiny investors who who signed up just to invest in your business and aren't focused on the corporate governance side of it so a jointer agreement is essentially um an appendix or a schedule that's added at the end of your shareholders agreement and it essentially allows anyone who fills it out and signs it and is witnessed to join on to the shareholders agreement without requiring a reissuance and a re-signing of the original agreement so this single document the single page essentially allows anyone who signs it and you know is witnessed by by a lawyer and signed by you the corporation those people are able to quickly join on to your shareholders agreement and become shareholders so all businesses working with equivesto need to include a jointer agreement in their shareholders agreement so that we can rapidly add these new shareholders to your agreement without you know all those complications so as i was just describing it's important to you know have that in place uh as an appendix so it doesn't require the resigning like it would require in a more traditional environment and this is just much easier when you have you know many many more shareholders here's an example of a jointer agreement which is an excerpt from our uh free template at equivesto.com so it's very simple essentially the the new shareholder puts their information in dates the agreement signs it and it can be witnessed by you know the the company and aura or the company's lawyer so we've covered a lot of different points relatively quickly so i decided to summarize exactly what is required versus what is recommended in terms of modifying your shareholders agreement when uh going and doing an equity crowdfunding round so if you want to work with equivesto these are the requirements you need to have prior protection for minority shareholders like tagalong and drag-along rights you need to have the jointer agreement added at the end of your shareholders agreement you also need to have permission for the shareholders or the board of directors to issue an unlimited number of shares from the new share class that will be used for equity crowdfunding and it needs to be not required for the corporation to issue share certificates in terms of recommended changes um as i described a bit earlier there are several areas that aren't required but we highly recommend are put in and modified in the shareholders agreement which will be sort of ease of use uh changes for the management of the of the business so we recommend they move all but critical decisions from shareholder vote to board control we recommend that you minimize the number of shareholders meetings per year to only the required one we recommend that you have at least three board members with no veto rights but no more than seven we recommend that you hold at least quarterly board meetings and we recommend that you remove the non-compete clause from the crowdfunding share class that essentially summarizes uh the changes that we require and recommend to a shareholders agreement when equity crowdfunding with equivesto thank you very much for watching and i look forward to answering your questions uh so the first question i think is from uh anatoly and you said what are the comments about drag along and tag along clauses for shareholder agreements you know drag along and tag along uh rights protected the minority shareholders the unlimited share issuance what are the risks of that so just to be clear when talking about the unlimited share issuance um i'm we're talking about giving the shareholders of the business the right to issue as many shares as they would like of a certain share class we are not saying that they're able to issue unlimited shares whatever they want we're not saying that they can issue shares without checking with anyone ideally what we want to do is for the equity crowdfunding share class we want to make sure that it's possible for them to issue enough shares for the current round of equity crowd funding and often the shareholders agreement is being amended and signed prior to the full discussion of the of exactly the equity crowdfunding round and we don't want to limit necessarily the number of shares that can be issued but again issuing shares the decision to issue shares should be something that is uh governed at the shareholder level and should require a shareholder vote so shares can only be issued by the corporation not by shareholders uh so i see your question uh amit here about um how shareholders can be issuing shares so only the corporation can issue shares the business the corporation is a separate legal entity to uh to the individuals who have invested in it and only the corporation itself can issue shares the shareholders agreement outlines and decides how the corporation can go and issue more shares and what the limits are on that so what we recommend is that in the rules in the shareholders agreement the corporation is allowed to create as many shares of whatever share class the corporation so chooses but the corporation can only choose to issue shares when it's being given permission so that can either be done at a board level decision or at a shareholder level decision i would recommend that the the decision to issue new shares is done at the shareholder level decision so that all shareholders are notified that new shares are going to be created and they potentially can have a vote or a say um when new shares are being created because that will dilute their percentage control however as a caveat we do recommend that you give permission for the board of directors to issue up to five percent of the total number of outstanding shares without needing to seek uh shareholder approval this would allow them to essentially create new shares for employee stock options and you know giving uh bonuses to employees and things like that but it's limited to the maximum five percent so sometimes in shareholders agreements there's actually a line written in that says you know the corporation can only issue 10 million shares from class a uh and so what we're recommending is that there you that limit is not included there but the decision to issue the shares is still done at a shareholder level uh except for a small amount that can be done at a board level um can another question has come in uh yeah i'm here now by the way yes for anatoly um can you offer non-voting shares during a crowdfunding investment round for investors yes you can and that is actually a share class that we recommend at equivesto so you would issue uh non-voting common shares and so this would allow the individuals to invest in your business uh to potentially benefit from any dividends or the the sale of the business uh and they would have those minority rights protecting them but they would not have voting rights so they could still potentially come to your shareholders meeting and you know get your annual update of what's going on but they would not have the ability to vote on any shareholder decisions um any decisions being made by the shareholders need to be done at a shareholders meeting uh and so they would be able to witness and see those decisions but they would not actually have a vote or a say in the decisions so that's that's sort of our recommendation all right everyone thanks for joining us today thanks for all the questions i appreciate it and we'll see you all next time