- Rights in a business come from a share in the authorised capital or a shareholder agreement, not a handshake.
- Money transferred to a founder “for development” is, for the law, an ordinary transfer.
- Agreements between partners are written down before the money is transferred, not after.
Someone comes into a startup as an investor, puts in twenty thousand dollars and is considered a partner on a handshake. A year later they're pushed out of the project. How much will they get back under the law?
Most often, zero.
A partner on a handshake is legally nobody
No document means no share, no rights and no money back.
Rights in a business don't come from a handshake but from a share in the authorised capital recorded in the register. Or from a shareholder agreement, a separate instrument under the LLC Law. And when you simply transferred money to a founder “for development”, for the law that's an ordinary transfer. Proving it was an investment with conditions is almost impossible.
How it should be done
There are two workable options:
- you're added as a member with a share in the authorised capital;
- you sign an investment or shareholder agreement: how much you put in, what you get, what happens if they want you out.
And all of this before the money is transferred, not after.
Friends, 60/40, and a director who vanished
Two friends started a business and split the shares 60/40. Complete trust. The one with 40% became director.
They bought cars and equipment for the company and got to work. Some time later the director simply disappeared: not answering the phone, not showing up, the access gone with him.
And it turned out the partner with 60 percent could do almost nothing. You can't just replace a director, you can't dispose of the assets, the cars sit idle. One partner holds the whole business hostage simply by doing nothing.
How much the owner of the larger share can actually do depends on the articles. The model articles don't provide for such situations.
What to write down while you're still friends
- What to do when the votes split down the middle.
- Who can replace the director, and how.
- Who can sell a share and to whom, and whether the other members have the right to buy it first.
- Whether a partner may open a competing business.
- How the share is valued on exit.
- What happens to a share on a member's divorce or death.
Not every company needs all of this. Choose what could really happen to you.
Articles or shareholder agreement
The articles are public; anyone can see them in the register. A shareholder agreement is confidential and binds the members. The articles hold the rules for the company; the agreement holds what partners don't want to tell the world.
While you're friends, these documents seem like needless paperwork. In reality they turn out to be the most important ones.
A story that cost billions
In 1976 Ronald Wayne owned ten percent of Apple. Twelve days later he sold his share for $800, because he was afraid of being personally liable for the partnership's debts. Today that share would be worth billions. A business structure is best thought through at the start, while the cost of a mistake is small.
More: articles and shareholder agreement and buying a share in an LLC.
Frequently asked questions
Does a shareholder agreement need to be notarised?
The law requires written form. Notarisation isn't mandatory, but for some terms I advise having the signatures certified.
Can outsiders see a shareholder agreement?
No. Unlike the articles, which sit in the register, the content of a shareholder agreement is confidential.
Can a shareholder agreement be signed if the company is already operating?
Yes, at any time. Preferably before disputes start.
This article is general in nature and is not legal advice. Every situation has its own nuances.
