Business development · 17 August 2017

Why does my business partner feel unsafe in our shareholders’ agreement?

Shot of two businessmen having a discussion in an office
There is no legal requirement to have a shareholders’ agreement, but it can make your life much easier

Having previously covered the benefits of shareholders’ agreements for small company owners, Grid Law founder David Walker responds to one reader whose business partner feels unsafe entering an agreement as a minority owner.

Background

My business partner and I have been running a startup advisory firm for over a year and are now putting in place a shareholders’ agreement.

We have been knee deep in exciting client work from day one. I started the business, provide the on-going funding and attract and build the client relationships. I sought my partner out for his unrivalled ability to create curriculum content. Working with him is effective and enjoyable. We are now eight people and growing.

Conundrum

I offered my partner a third of: the business, revenue (on the first £1m annually) and profit after £1m of revenue.

As we have gotten into the shareholders’ agreement with our lawyer, my partner feels unsafe. As I’m the majority owner he feels I can, if push comes to shove, act without constraint and to his detriment.

To counter this he’d like to own the copyright for the materials he creates and to provide our little company with an unlimited licence. I’m uneasy about sharing the IP.

  • I think original content and curriculum design is what he gets paid for, and it’s the reason why he will own a third of the business.
  • I fear it will lead to a hording working relationship with each party trying to claim development rights. This hasn’t been the case at all to date and the output has been better for it.
  • It wouldn’t want competitors to be able to use the materials and frameworks we have developed.

Questions

  1. Is there a way to make him feel safer in the shareholders’ agreement?
  2. Am I being unreasonably worried about the implications of sharing IP?
  3. What am I missing?

David’s response

This is a situation I often come across. The good news is that the shareholders’ agreement should give your business partner the security he is looking for.

Without a shareholders’ agreement, company law would give you – the majority shareholder – control of the business. The shareholders’ agreement can prevent this by including protections for the minority shareholder.

For example, you can agree that certain, important decisions relating to the business require both of you to agree on them. I’m assuming that there are just two of you in the business, so you have to be a little careful about deadlocks – i.e., resolving a situation where you really cannot reach an agreement. Again, the shareholders’ agreement can provide a method of resolving this.

For example, if it was a financial matter your accountant could provide an opinion, or if it was an intellectual property issue your lawyer could provide an opinion. This opinion may not be binding on you both, but it may help to resolve the deadlock by providing an expert perspective on a matter.

I agree with you that your partner should not own the copyright in the materials he produces and that they should all be owned by the company. There are a few reasons for this.

The main reason is the strength of the licence. What happens if your partner was to leave the business and work with a competitor? Could he terminate the licence leaving you without the right to use the materials he produced?

If he could, this could be devastating for your business, especially if he shared them with a competitor.

If he cannot terminate the licence, then what is the advantage to him of licensing the materials to the company?

Another reason for the company to own all of the intellectual property is that with ownership comes responsibility.

Say your partner did retain ownership of the materials and licensed them to the company. What would happen if someone copied them without authority and infringed his rights? Would he be prepared to take legal action to protect them?

He may be reluctant to do this but the company could take action with less personal risk to him.

Also, I imagine that the intellectual property rights are going to be what gives the company its value. I don’t know what your future plans are, but if you wanted to sell your business at any time, the purchaser would want to own these rights. Without them, the business would be worth a fraction of what it is worth with them.

So, in summary, the shareholders agreement can make your business partner feel safer by restricting your ability to make decisions on your own.

You’re not being unreasonably worried about the IP – in my opinion all of the rights should be owned by the company. As you say, this is what he is being given a share of the company for.

Are you missing anything? 

You need to make sure that everything he has created to date is assigned to the company. If he is an employee of the company now, then everything he has produced in the course of his employment should automatically be owned by the company.

However, if he’s not an employee and is a consultant to it, everything will need to be assigned. This can either be done as part of the shareholders’ agreement, or by way of a separate agreement.

Take a look back at some of our other favourite David Walker articles:

Sign up to our newsletter to get the latest from Business Advice.


 
TAGS:

ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

Insurance