If you choose to pursue investment in your business as a funding option, you need to be prepared to hand over equity in exchange. Any investors who back your business will receive shares in exchange for their financing, giving them a stake in your company.
Once they have invested, investors will retain their shares for some time. Due to this long-term relationship with your company, it’s essential that you are fully aware of their role and how they may impact your business. This will help you find a shareholder relationship that works for you and check that you’re happy to sell shares.
In this guide, we have explored what a shareholder is, what they’re entitled to and how they might influence the running of your business.
What is a shareholder?
Simply put, a shareholder is someone who owns shares in your business, usually after investment. Their aim will be for their shares to grow in value as your company grows so that they generate a profit from their investment.
Once someone has shares in your business, they may own them for years to come. This timescale very much depends on when they wish to sell shares or if they decide to step away from the company. In the latter case, you should have a devised exit plan that agrees on the terms in advance.
A shareholder’s role will vary based on their preferences and the agreement you made when they joined your company. Some may take a more hands-on approach than others. However, they do have the ability to influence your business, with specific rights and entitlements you need to grant them.
What entitlements does a shareholder have?
A shareholder has various entitlements within your venture.
Firstly, they may have voting rights that enable them to have their say in crucial business decisions. This could include appointing new board members or removing existing members. In some cases, they might even influence what powers and salaries directors are given. They can also vote in other significant decisions, which could affect the direction your operations take and your policies.
You will need to host regular meetings between shareholders where they are given a chance to discuss their concerns and opinions. You will also be expected to notify them of any relevant news. On top of this, they have the right to access your quarterly or annual financial reports, so they can see how the business is faring.
Your shareholder’s agreement will outline any further rights or entitlements they have, so you must make sure this contract is in place between every shareholder to clarify what is expected in the relationship. The rights detailed must be given in all circumstances, even if there’s information you don’t necessarily want to share with them.
Is their influence good or bad?
There is no denying that shareholders can have a great influence on your business, which may be an issue for some companies, especially if they want total control. However, the power they have isn’t necessarily detrimental.
Firstly, it’s important to note that you have no requirement to do everything a shareholder wants, especially if you disagree. They may provide their opinion, but you do not need to let their thoughts dictate the running of your company. The only exception to this is if it’s a vote, and you are outnumbered. Regardless, you will likely want at least to listen to their views and take their recommendations on board where possible to keep them on the side.
In many cases, having the views of your shareholders is beneficial. It adds perspective to your company, helping you to consider other viewpoints and identifying new ways of doing things. Shareholders may bring valuable industry experience which will guide you in the right direction. They may also introduce you to their contacts, which could prove a huge stepping stone for your business.
One factor to bear in mind is the priorities of your shareholder. They are likely to focus on profit objectives so that they can access a better return on their investment. This may make some businesses feel pressured to generate revenue quickly and make decisions that facilitate profit rather than other objectives.
However, it’s essential to remember your shareholders should be just one of many voices in your business – you should listen to them, but also your directors, partners, staff and customers. This will enable you to weigh up different perspectives and settle on the best choices for your company – whether it’s profit-driven or not.
Ultimately, it is your business, which means you will usually have the final say about how it runs, as long as you have control. However, you need to recognise and appreciate the financial backing your shareholders have given, without which you may not be able to exist or grow. This means keeping their interests in the picture. It’s also a requirement for any company to act in the best interest of shareholders by making sure your decisions enhance share value.
If you don’t, you risk shareholders voting with their feet and selling shares if they’re concerned about falling values. This could put you in financial jeopardy and damage your reputation, so it’s best to avoid getting into that position.
Conclusion
Understanding the role and influence of a shareholder is essential before you commit to bringing them into your company. Most crucially, you need to be prepared to listen to other voices in your business and allow them to have their say in your critical decisions.
If you are prepared to handle that, you can win long-term financial backing and invaluable experience from those who have worked with many businesses just like yours.
If you’ve decided that bringing investors into your business is the right choice, we can start you on your journey by improving your investment readiness and getting you in touch with relevant contacts.
Get in touch today to find out more about our consultancy services.