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Shareholders Strategy

I see it every now and then, too often really: Startup teams ending up in flames, sometimes even in court. Startups founding team is really the core of any startup, but too often people fail to discuss the basics properly early on, and end up fighting with each other when they should be accelerating growth.

More often than not, startups are founded on a passion to do something. Founders understand that the startup doesn’t have any value anyway in early stage, so why spend effort on e.g. deciding who owns or how much of a miniscule venture. Rather they spend all their efforts on making the MVP and making proof that there indeed is a business.

Luckily, most companies have shareholder agreements setting the basic ground rules as a legally binding document, but they still lack the overall intent of why the company is founded, what is important to the founding team members, and so forth-- those are not part of shareholder agreement, nor they should be.

At best, shareholder strategy for a startup is a one page - and one page only - summary of the most important topics from shareholders’ point of view. In short it should convey what the owners, typically collectively, require from the company: “if the company is ran within these boundaries I’m happy as a shareholder”. Most startups start with a template.

The document should have details and clear statements, and limitations. For example, “the company’s exit plan is to sell the IPR to a Google-type of industrial player by end of 2025 at 40-50 Me valuation.” It has enough details and clarity for the board to develop the plans and challenge/support the operational team achieving the goals.

As shareholders strategy is basically a statement from the owners, it does not need to be approved by the Annual General Meeting, but in some cases it may make sense. Similarly, while most startups and small companies should only have one document representing all owners in some cases making more than one explicit shareholder strategy may make sense, e.g. when majority shareholders are involved operationally with the company, and minority shareholders are not.

In most cases, the shareholders of the company should be active creating the shareholder strategy, but should that not happen it’s boards (and specifically chairpersons) task to ensure they have sufficient understanding of shareholders wishes, expectations and limitations.

Once shareholder strategy is in place and communicated to the board, it has a clear connection to board practices - while company strategy is something board decides on, the shareholder strategy is a guidance from shareholders to the board and operational management.

Shareholders strategy should not be done once and then forgot. Instead, as situations change, understanding of realities develop and new shareholders join the venture the shareholders’ strategy should be revisited and reapproved as needed.

While this blog post was written specifically with startup and growth company focus, same topics are also valid for other companies with multiple shareholders.

Teemu Polo

#AgileStartupBoards

(Suomen Yrittäjien Kasvuyrittäjäverkoston johtoryhmän jäsen 2018-2019)

 

Teemu Polo

Teemu Polo is a specialist in start-ups and business development, and a member of the management team of the Start-up Network (Kasvuyrittäjäverkosto).

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