Entrepreneurship & Small Business

Questions about shareholder agreement

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  • Oct 29th, 2018 6:51 pm
[OP]
Sr. Member
Dec 10, 2002
657 posts
31 upvotes

Questions about shareholder agreement

questions for your small business owners ;-)

drafting a shareholder agreement from lawdepot.ca... have the following questions..

For a private small startup company, what is the common number of shares I should issue? 1 million with each share worth 0.001? or 0.1 million each worth 0.0.1?

Also, should I leave a certain amount of shares in a pool? what is the purpose of having a share pool? to give to future shareholders? what is its advantages and disadvantages?

Is it OK that the shareholders are also directors and officers?

For dividends, what is the general rule? e.g. pay shareholder 100% of the dividends or only a portion? I am thinking 50% dividends and leave another 50% for company growth? Or 25% to shareholders and 75% for growth? what is the usually portion?

thanks
6 replies
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Mar 23, 2008
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Edmonton
I don’t think you’ll get much useful input without giving some information about your situation. The setup for a one man IT contractor corporation would be much different than that of company with many shareholders and partners. There’s no one “right” answer.

C
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Sep 23, 2007
4433 posts
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go77306 wrote:
Oct 28th, 2018 7:40 am
questions for your small business owners ;-)

drafting a shareholder agreement from lawdepot.ca... have the following questions..

For a private small startup company, what is the common number of shares I should issue? 1 million with each share worth 0.001? or 0.1 million each worth 0.0.1?

Also, should I leave a certain amount of shares in a pool? what is the purpose of having a share pool? to give to future shareholders? what is its advantages and disadvantages?

Is it OK that the shareholders are also directors and officers?

For dividends, what is the general rule? e.g. pay shareholder 100% of the dividends or only a portion? I am thinking 50% dividends and leave another 50% for company growth? Or 25% to shareholders and 75% for growth? what is the usually portion?

thanks
I don't think the number really matters. What matters is you don't record the shares as common stock. The most useful setup for a small business is to issue $100 of common stock and the rest as shareholder loan. Like if you invested 100k, record 99,900 as shareholder advance and 100 as common stock. The exact structure probably doesn't matter if it's a 1 person corporation. If you have multiple shareholders and they are not family, and you are investing over $100k, I highly recommend you seek a professional to draft this shareholder agreement. People team up to do businesses with the best of intentions but when push comes to shove, everyone who is not family will prioritize themselves first. This is to be expected.

For dividends your question is backwards. 90% of small businesses fail in their first year. You'd be lucky to have any profit to declare as dividend within the first couple years. And like I said, if you record your initial investment as shareholder advance, you can just take the money back tax free because it's a loan. So there's is no general rule. If your business is making a $10M, you are welcome to withdraw $8million and invest the other $2million. In the more realistic situation you will find yourself with "projects" and then saying "I don't have enough money to do it". Not "What % to leave in the business". When you look at the available projects you can take (like invest in a new product line, or hire someone to do this work), that will determine your cash flow planning. And in a small business setting your personal cash needs matter too. You need to pay for living expenses. There is no usual portion. The usual case is one of the business failing to generate enough cash to even pay for rent or staff, triggering the business to wind down.

Yes it's ok the shareholders are also directors and officers. You can give yourself whatever title you want.
[OP]
Sr. Member
Dec 10, 2002
657 posts
31 upvotes
Thanks @BananaHunter

So what about the share pool? I am paying all expenses from my own pocket, so your suggestion is very good, I will mark whatever I invested so far a shareholder loan, will issue $100 worth of share. However, I have seen some examples online that issuing a pool that nobody owns it for future use. For example, person A owns 50%, B owns 20% and C owns 20%. The remaining 10% is left in a pool. So what is the purpose of this pool? for incentives to the all the shareholders if they are doing a great job they can get some of it? or for future employees? What is the difference if I hold 60% (50% plus the remaining 10%) and if we decide to give to someone who has done a great job later (or a future employee) some shares and I will just transfer a certain amount from my shares to him?
Penalty Box
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Feb 10, 2007
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i think you should consult a real lawyer for this

what you thought may be legal could be illegal and so on.
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Deal Addict
Sep 23, 2007
4433 posts
780 upvotes
go77306 wrote:
Oct 29th, 2018 7:23 am
Thanks @BananaHunter

So what about the share pool? I am paying all expenses from my own pocket, so your suggestion is very good, I will mark whatever I invested so far a shareholder loan, will issue $100 worth of share. However, I have seen some examples online that issuing a pool that nobody owns it for future use. For example, person A owns 50%, B owns 20% and C owns 20%. The remaining 10% is left in a pool. So what is the purpose of this pool? for incentives to the all the shareholders if they are doing a great job they can get some of it? or for future employees? What is the difference if I hold 60% (50% plus the remaining 10%) and if we decide to give to someone who has done a great job later (or a future employee) some shares and I will just transfer a certain amount from my shares to him?
If you don't know the purpose of a share pool, then I'd say you don't need it. I suggest you focus on actually running the business so you actually have money to make your question relevant.

I don't think you need anything with a defined term like "share pool". In a healthy business relationship, you should be talking upfront about scope of work and who earns what. For example, Bob does accounting and lets pay him $500/month. Jill deals with clients and works 5 days a week so $2500/month. These are like recurring salaries for regular work. Then if Bob invested 60% and Jill 40%, you can agree that profits after all expenses split by 60/40. Usually you do this with an eye on your cash flow needs. Like if you have $25k sitting in bank, you go "I need 5k for rent, 3k for salaries etc. So let's take 10k and this leaves 7k in the business to deal with unexpected stuff.

Not only should you focus on running the business, but you should also have regular communications with the other shareholders. In a small business setting it's important for active partners to be involved and touch base.
Newbie
Oct 28, 2018
1 posts
Lawyer here!

The main concern with shares and different classes of shares is tax planning, when incorporating you will describe the types of shares you will have and the characteristics of different classes of shares. You can start out simple, and if you determine later down the line that you need additional classes of shares, you can amend your Articles of Incorporation to modify your shares. You can issue yourself 100 common shares for $0.01 each, or you can issue yourself 1 common share for $100.00, it doesn't make too much of a difference. The main things you want to be concerned about in your shareholders' agreement are exit strategies, terms of shareholder loans, anything that can become an issue if the relationship between the shareholders breaks down in the future. Your shareholders' agreement is your safety net against expensive litigation down the road if you and your partners cannot agree.

With regards to Share Pools, or rather Option Pools, these are a class of shares you can reserve for your employees in the event that the corporation goes public. This gives employees an incentive to help the company succeed. Depending on the nature of your business, and the complexity of your funding structure, this may or may not be appropriate for you.

I would highly recommend consulting with a lawyer and an accountant before incorporating and signing a shareholders' agreement. It is also important to note, that incorporation is not always the best step for a new business. Unless you will be generating more profit than you intend to withdraw from the corporation in a given year, you may find yourself being double taxed on the money you are making.

Hope this helps!

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