Connect with us

Start-up Advice

How To Create Founding Documents

If you don’t put the right structures in place early on, you just might find that everything comes tumbling down…

Andrew Taylor

Published

on

founding-documents-starting-a-business

Launching your own start-up is no easy feat, and, is likely to be one of the most daunting steps that you — and those on the roller-coaster with you — will ever take.

The value of tapping into the advice and experience of professionals with expertise in your area of need cannot be underestimated.

First off, it’s important to realise that there are huge benefits to having a firm grasp of the basics of the legal questions surrounding your venture, because these obligations apply — whether you know they do or not. Once you’ve registered a company, the first thing you ought to do is to procure customised founding documents.

Related: Start A Business They Said… It’ll Be Easy, They Said…

The founding documents of your company are just that — the foundation of your company.

A customised Memorandum of Incorporation (usually referred to as an MOI) seeks to govern several relationships, including: 

  • Those between the individual shareholders of the company;
  • Those between the shareholders as a group and their obligations to the company; and
  • Those between the company and the outside world.

Your MOI is a public document which is lodged with the Companies and Intellectual Property Commission (the CIPC). The CIPC also provides a standardised MOI which operates unless your company adopts a new, custom MOI.

In most cases, the adoption of a custom MOI will suffice, but, in limited circumstances, your company may warrant a custom shareholders’ agreement. In this event, your legal expert will ensure that the agreement is consistent with both the company’s MOI and the Companies Act 71 of 2008. A shareholders’ agreement is, in essence, a private contract between the parties to the agreement.

Specifically, the Companies Act provides that if a shareholders’ agreement is not consistent with the company’s MOI or the Companies Act, the shareholders’ agreement is void to the extent of its inconsistency. What follows, serves as a starting point when constructing the brief to be presented to your legal professional.

[dropcap]1[/dropcap]

Directors

A company’s board of directors governs the day-to-day operations of the company and the title carries significant responsibilities, both in terms of legislation and the common law.

Their management of your company regulates, among others, the agreements it enters into, its ability to loan money and the ability to encumber the assets of the business.

Further, it’s important to clearly delineate the voting powers of the board and, as a shareholder, you may wish to limit the powers of the board in certain circumstances — such as entering into an agreement for the disposal of a majority of the assets of the company or, at least, require special authorisation prior to taking actions with such significant impact on the business.

[dropcap]2[/dropcap]

Shareholders Meetings

Although the distinction is sometimes ambiguous, especially where shareholders and directors are the same people, your founding documents need to define the roles of shareholders — both as between their fellow shareholders and as between the shareholders and the company.

Your agreement ought to regulate when, how and where shareholders meetings occur and how many shareholders are required in order for the meeting to be considered a valid meeting between shareholders of the company.

This is an area where a minority shareholder may be left out in the cold, unless particular safeguards are carved out for the shareholder.

Voting at a shareholder level also needs to be regulated, and requirements for ordinary resolutions (usually 50% plus one) and special resolutions (usually 75%) need to be provided for. Where the agreement between shareholders is not achieved, mechanisms need to be inserted to cater for such deadlock — whether by arbitration, mediation or otherwise.

Related: The Basics Of Registering A New Company

[dropcap]3[/dropcap]

Dividends and Repayments to Shareholders

boardroom-meeting

This is one of the primary drivers behind getting involved in a business, so, where the payment of dividends to shareholders is concerned, special attention needs to be paid to ensure that everyone understands where they stand — before the chips are down, so to speak.

You need to carefully consider the circumstances under which a company will repay loans advanced to it by shareholder’s needs. This will also operate as a way to manage perceptions and ensure expectations are kept in check.

[dropcap]4[/dropcap]

Share Capital

This fundamental provision caters for the maximum number of shares a company can issue to its shareholders and provides clarity to all shareholders about the extent of their ownership of the company. It ought to cater for the distinctions between any different classes of shares, where relevant.

[dropcap]5[/dropcap]

Restricting the Transfer of Shares

Pre-emptive rights, or rights of first refusal, are characteristic of private companies and one of the obligations owed to your co-shareholders. In essence, once you form an intention to sell your shares, you are required to first offer them to your co-shareholders.

Where an offer is received from a third party, that shareholder is required to first offer the shares to the other shareholders on the same terms. In other words, he/she may not sell his shares to an outside third party on terms that are more favourable to the outsider.

[dropcap]6[/dropcap]

Deemed Offer

A deemed offer — which arises in limited, pre-agreed circumstances — forces a shareholder to offer up his shares for purchase by the other shareholders, upon the occurence of a trigger event.

It’s important to ensure that you agree on the manner in which the purchase price of the shares in such a situation will be determined. A legal expert is able to cater for these circumstances within the specific framework of your business needs.

Related: Tax Basics For Business Owners

[dropcap]7[/dropcap]

Come-Along & Tag-Along Provisions

Tag-along provisions cater for the event of a majority shareholder selling their shares to a third party and, rather than leave a dissatisfied minority shareholder behind, the sale of the majority shareholding is subject to the offer being extended to the minority shareholder on the same terms.

Closely related to these provisions are come-along provisions, which prevent a minority shareholder from blocking a sale of the majority shareholder’s interest in the company.

In essence, where one or more majority shareholders wish to sell their shares to a third party, the majority shareholders can force the minority shareholders to sell their shares on the same terms.

The above can, at best, only be regarded as a guideline, and if anything, serves to illustrate how template founding documents cannot be relied upon as a one-size-fits-all approach to fitting the unique needs of a company and its shareholders. Specifically, the contents of this article ought not to be relied upon as legal advice.

Andrew Taylor is the co-founder of Legal Legends, a company that aims to revolutionise the legal industry by being Africa’s first eCommerce website for quality legal services aimed specifically at start-ups and entrepreneurs

Advertisement
Click to comment

You must be logged in to post a comment Login

Leave a Reply

Start-up Advice

Put On Your Wellies: It’s Time To Wade Into Risk

Entrepreneurs aren’t all leaping into the unknown like lemmings off a cliff, but they do need to consider it…

Chris Ogden

Published

on

risk-management-rain-boots

You’ve had a great idea. You’ve looked into its development. You’ve recognised that it has potential beyond just what Auntie Mabel and Mike From The Grocer think. And you’ve clearly nailed a pain point that can make money. Now it is time to take the risk of running with it.

Every big idea comes with risk. You can’t step out into the world of entrepreneurial thinking and business development without it. Your idea may fail. It will also be time consuming, demanding, hungry for money, and hard work. It is unrealistic to expect that your project will leap out into the world and be an unmitigated success.

It is also unrealistic to assume that it isn’t worth taking this risk.

There are steps that you can follow to ensure that your risk is managed so you aren’t blindly leaping off that cliff…

Step 01: Do your research

No, canvassing your neighbours, friends and family is not doing research. You need to know that your idea will appeal to a broad market and that it will have significant legs. This may sound like daft advice, but you would be surprised how many people think an idea will take off just because Susan in Accounting said so.

Step 02: Understand the costs

Projects are hungry for money and investment. Realistically work out your budgets and how much it will cost to take your project off the ground and then stick to it.

A calculated risk is a far better bet than one that shoots from the hip and hopes for the best. You can also use this as an opportunity to draw a clear line under where you will stop investing and end the project. If it keeps eating money and isn’t getting anywhere with results you need to be able to walk away.

Step 03: Know when to walk away

As mentioned before, this can be defined by a line you’ve drawn in the proverbial sand (and budget) but no matter where you draw this line, you have to stick to it. Often, when time, money and energy have been poured into a project it can be incredibly hard to walk away.

You think ‘but I have put so much into this, just one more’ and then it gets to a point where the ‘just one more’ has taken you so far down the line that walking away feels impossible. Leave. Learn the lessons. Apply them to your next project.

Continue Reading

Start-up Advice

Mind The Gap

The entrepreneur’s guide to finding the gaps and building the right solutions.

Chris Ogden

Published

on

entrepreneurship-gap

Innovation may very well be the key to business success but finding the gap into which your innovative thinking can fit is often a lot harder than people realise. Some may be struck by inspiration in the shower, others by that moment of blinding insight in a meeting, however, for most people finding that big idea isn’t that simple. They want to be an entrepreneur and start their own high-growth business, but they need some ideas on how to find that big idea.

Here are five…

1. Network

It sounds trite but networking is actually an excellent way of picking up on patterns and trends in conversation and business problems. The trick is to note them down and pay attention. Soon, you will find patterns emerging and ideas forming.

2. Look for pain

Just as networking can reveal trends in the market, so can spending time reading. The latter will also help you find common business pain points. These are the touchpoints that frustrate people, annoy business owners, affect productivity, or impact employee engagement.

Be the Panado that fixes these pains.

3. Luck

luck

This is probably the most annoying of the ideas, but it is unfortunately (or fortunately) very true. Luck does play a role in helping you capture that big idea. However, luck isn’t just standing around and random people offering you opportunities. Luck is found at networking events, it is found in research and it is found in conversations with other entrepreneurs.

4. Luck needs courage

You may have found the big idea through your network, a pain point or pure blind luck, but if you don’t have the courage to take it and run with it, you will lose it to someone else.

Being bold in business is highly underrated because most people assume that everyone is bold and prepared to take big leaps into the unknown. However, not all brilliant entrepreneurs were ready to throw their family funds to the wind and leap into an idea – they were courageous enough to figure out a way of harnessing their ideas realistically.

5. Pay attention

This is probably one of the most vital ways of finding a gap in the market. Often, people are so busy that they don’t really pay attention to that niggling issue that always bothers them on a commute, or in a mall, or at a meeting. This niggling issue could very well be the next big business opportunity. Pay attention to it and find out if that issue can be solved with your innovative thinking.

Continue Reading

Start-up Advice

5 Things To Know About Your “Toddler” Business

As you navigate this new toddler phase of your business, here are five things to bear in mind.

Catherine Black

Published

on

small-business-start-up

Ah, toddlers. Those irresistible bundles of joy bring a huge amount of energy, curiosity and fun to any family – but there’s also frustration and worry that comes with their unpredictability, as they grow and start to become more independent. If you own a business and it’s successfully past its “infancy” of the first year or so, it’s likely it will also go through a toddler stage of its lifecycle.

Pete Hammond, founder of luxury safari company SafariScapes, agrees with this. “Our business is now three and a half years old, and we’ve found that we’re not yet big enough to justify employing a large team of people to handle the day-to-day admin tasks, yet we still need to grow the business as well,” he says. “As a result, our main challenge is finding the time to step back and see the bigger picture. Kind of like when you are raising a busy toddler and you spend most of your time running after them!”

As you navigate this new toddler phase of your business, here are five things to bear in mind:

1. This too shall pass

Everything in life is temporary – and that goes for both the good and the bad. It’s as helpful to remember this when you’re facing the might of a toddler temper tantrum, as it is when you’re facing throws of uncertainty in your business. If your new(ish) venture is going through a rough patch in its first few years, it can be easy to think about giving up – but don’t. As long as you have an overall big idea that you believe can add value to your customers, keep pushing through the rough parts until you come out the other side.

2. Appreciate what this phase brings

The toddler years mean that the initial newborn joy is officially behind you. But these small humans also bring their own kinds of joy, as you watch them learn new skills, say funny things, and give affection back to you. While your two-year-old business may not hold the same exhilaration for you as it did during those first few months, there are now different things to appreciate about it: Maybe you’re expanding your product range, or employing new people who can take the workload off you.

3. Establish boundaries

Toddlers thrive on boundary and routine – and your toddler business will too. As it grows into a new phase, try and establish limits in terms of the type of clients you want to work with and the type of work you’ll do. It’s also a good idea to make a decision about the hours you’ll work and when you’ll switch off, which will help you establish a good work-life balance.

4. Take a break

Every parent with a toddler needs a break every now and then, even if that means a walk around the block (on your own!), a dinner out with friends, or even a few days away. The same is true for a demanding small business: every so often, remember to take time out to rest properly, where you switch off your laptop and completely unplug. You’ll return much more inspired and resilient to deal with the everyday uncertainty that it brings.

5. Give it space to make mistakes

While the unpredictability of a young business can be stressful and tiring, it’s also a time for trying new things without the risk of huge consequences if they don’t quite work. After all, it’s much simpler to change your USP if you’re a small business employing a few people, rather than a big company where 50 people are relying on you for their salary, or where you’ve received a huge amount of investment capital. While you may fail in some of the things you try with your business (in fact, this is almost guaranteed), see it as a toddler that’s resilient enough to pick itself up, dust its knees and keep moving forward.

During this phase of business growth it’s also essential to have the right type of medical aid cover. There are medical schemes such as Fedhealth which has a number of medical aid options and value-added benefits to ensure that your health and wellness is taken care of too. After all, the healthier you and your staff are, the more productive your business will be – during the toddler (business) stage and beyond.

While this phase can be frustrating, it’s a sign that your business is growing and adapting, rather than remaining in its infancy, and that can only be a good thing! So embrace the difficulties, learn from them, and watch as your business strides forward confidently into the next exciting phase.

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending