NSW Issues with Shareholders Agreement - Where Do I Stand?

[brage]

Hi there,

I came up with a new invention last year and got an investor on board to make it happen. The original deal I offered was $100,000 for 20% he raised it to 30% and I agreed.

Before making up the shareholders agreement he emailed me and said,

"When reviewing the financials (sales forecast and cash flow) we will need approximately $200-250k over the first 12-14 months to get "business name" to a sustainable $2m+ revenue business. I can fund this and avoid us having to take on an investor, therefore, avoiding any further dilution of our shareholding. Any larger investment, once established, could be funded by turnover and or borrowing from banks as we would have a very favorable monthly P&L position.

In return, I would naturally like to ensure, 1. My investment is returned first, and 2. I would like a larger shareholding for the associated risk.

Essentially I would like a 40% share of the business and want to ensure as the seed investor my return on capital invested is paid first.

I will discuss the logic of my request on our call later this morning."

I agreed to this and we signed a shareholders agreement 60-40% only because he told me he was putting more money in.

Now 12 months on he is not happy with the cash flow that has been coming in and we are up to the $100,000 he has now emailed me and said he would have to put another $20,000 in, but he wants now, even more, larger equity share to do so but, he still hasn't put the extra $100-150k that he said he would via email.

Mind you this person has very little to help the company and I have been working full time for 15 months on it. Thanks to my work we are about to be on a popular tv show so he knows the money's about to come in but I'm broke due to not being paid a cent this whole time while he pays family members for doing work for the business. Please help I'm feeling bullied and not sure where I stand.

Thank you in advance.

 

[Rod]

I'd be telling him to abide by the original agreement. If he can't or won't drop his shareholding to 20% (or 30%) and get another investor then you may have to seek court action to enforce your rights.

He using you to build his and his family's wealth, at your expense. You need to stand firm or you'll end up with nothing.

 

[Stephen Barry]

You need to get legal advice about the current shareholders agreement. It sounds to me that the current agreement did not properly record the understanding about the future funding of the company and possibly about the question of employment of family members.

I suspect that the agreement should have said that he would get 30% shareholding for a $100,000.00 share subscription and that if he contributed another $150,000.00 by way of share capital subscription, he would get another 10%.

Perhaps he should have been given an option to make the additional subscription otherwise the shareholders/directors needed a mechanism in place to determine how additional funding was to be obtained by the company.

It is always important to set up your shareholders agreement properly at the start of the relationship to cover the issues of contribution by cash or labour or intellectual property, distribution of profits (or further capital injection in the case of losses) and finally exit mechanisms for any shareholder who wishes to leave the venture.

 

[Matthew Karakoulakis]

Hi Brage

It is possible to rely on email conversations in some cases. However, as you have a written shareholders agreement, as a first step, I would recommend having a thorough read of the written agreement and see what it says with regards to your investor’s obligations.

If you require assistance reviewing the matter further, please do not hesitate to contact me via the link below or at [email protected] to arrange for an appointment to discuss your options.
Matthew Karakoulakis, Melbourne Lawyer: Book Online