PARTNERSHIP AGREEMENT

Accelerate your business with these expert tips on the "Partnership Pact". Analyse and discover this TIP!

The start of a startup always involves a lot of enthusiasm and a great desire to move forward with a business idea that entrepreneurs are convinced will be a success. Carried away by this initial euphoria, they sometimes forget that they must also foresee a series of complicated situations that may arise -which will certainly occur- during the normal course of the business. As we all know, the path that a startup takes is very much like the path of a roller coaster (+). The future is highly uncertain, and experience shows that during the first two or three years of life there are several substantial changes associated with multiple circumstances, and that during these ups and downs there are dangerous moments, or moments that seem to be dangerous. 

Because failure comes without warning, but success is always a long time coming. 

As the father of management philosophy, the Austrian-American Peter Drucker, warned: "During the first four years, no new enterprise makes a profit. Even Mozart didn't start writing music until he was four years old". Now things are running a little faster and some companies are profitable earlier, but even these companies usually go through more or less difficult stages. That is why, it is so necessary to know how partners will act in certain potential scenarios. On the other hand, the entry of investors implies a new social reality that needs to be well regulated. In this respect, it is desirable for a shareholders' agreement to set out the terms and conditions under which the investment is made. The way in which the investment partner enters and integrates into the company will differ according to its own profile. The conditions imposed by a business angel will not be the same as those imposed by other more sophisticated investors, such as the venture capital (+) or private equity. In short, the essential objective of a partnership pact is to make the rules of the game clear. In this context, it would seem normal that the investor, who has put up the vast majority of the money in exchange for a minority of the shares, always ask for clauses that protect you and allow you to participate in some of the company's decisions, especially those that affect your own financial rights. It is beyond the ambitions and scope of this TIP to go into the technical details of the partnership pact and the key role played in it by gentlemen who are not now seated at the table: future investors. 

A word of advice suffices here: never negotiate a shareholders' agreement with an investor without the advice of a good lawyer who works for you, who is paid by you, who you trust and who has already done several contracts with venture capital. It is sad to hear of cases in which the entrepreneur realises years later that he did not understand what he was signing and that, for example, he has 25 percent of the shares and when the company is sold for 20 million, he is only going to take 200,000 euros. 

Things of the liquidation preference (+), that clause that seemed so innocent when you went through the notary. So it is better to have everything in writing, in front of a notary, and well advised. Even without going into details, let me give you an example of some clauses that are common, and the reasons behind them, "such as the drag along ('drag along right' (see+)) and the tag along ('accompanying right' (see+)). There are investors who are more concerned about how the entrepreneur manages his money than about his exit from the project, and they include a thousand clauses detailing what the entrepreneur can or cannot decide without his consent on a day-to-day basis. Avoid them. If they want to run a company, let them start it. However, the most normal thing is that professional investors are more concerned with making clear the steps to be taken when a new capital increase arrives, when a new investor appears or when the time comes for them to stop participating in the project, a time and situation which, let us remember, is their main objective". The shareholders' agreement is not a new concept within the corporate law but which still comes as a surprise to many entrepreneurs who do not easily understand it. Its rise is due, on the one hand, to the insufficiency of the founding statutes to contemplate all the aspects that have to do with the relationship between partners and between founding partners and investors. The second factor driving this figure is therefore the rise of the so-called start-ups and their needs and alternative financing cycles. At present, the partnership agreement has become an essential prerequisite for the entry of accelerators, incubators, incubator platforms, incubation Equity Crowfunding (+) o Crowdlending (+). 

What is the shareholders' agreement?

The Partnership Pact is a private document in which the partners regulate the  situations not covered by the company's Articles of Association. Its purpose is to avoid conflicts and anticipate problems. and friction that may arise between partners. It is, therefore, an agreement between partners that serves to determine rules for action to establish how to proceed  in situations where the company is at riskThe project is described in detail in the project description and the roles of each member are assigned. As a private agreement, the Shareholders' Agreement has many legal implications and, a priori, will only be binding on the parties that sign it. Traditionally, the Partners' Pact was a This is necessary for large companies, especially multinationals, which tend to have a very complex corporate structure. 

This is not the case for start-ups whose structure is rather simple. The complexity in this case stems from the need to harmonise the interests of the founding partners and those of the investment partners. This is often a problem for the financial ecosystem that has grown up around startups. Investors do not want to be part of a company indefinitely, but to increase its value in order to exit at a significant profit. This exit of the investors may imply the exit of the founders, which Spanish law does not consider beneficial for the continuity of the company. It is precisely to counteract these circumstances and defend the interests of investors and also of the founders that this Partners' Agreement is used. 

How is a partnership pact made?

The first thing to bear in mind is that there are a multitude of model partnership agreementsHowever, it is always advisable to draft one that is specifically tailored to the nature and strategy of the business in question. It is sufficient to sign a document whose content is agreed by all the partners. This agreement must not be confused with the articles of association, which must be recorded in a public deed before a notary. When a modification is desired, the contractual nature of this agreement requires the agreement of all the signatories, without the application of the majorities established by the articles of association.

What does the shareholders' agreement regulate?

• GOOD GOVERNANCE OF SOCIETY

 Rules aimed at resolving conflicts or situations of deadlock in decision-making, mainly in the most relevant corporate bodies, such as the shareholders' meeting and the board of directors.

• MEMBERSHIP ENTRY

The entry of new partners and especially investors needs to have terms and conditions that suit everyone's objectives.

• PARTNER EXIT

The conditions under which this takes place, such as the right of pre-emption, towing and tagging rights, etc., shall be laid down.

• ROLES AND DEDICATION OF EACH PARTNER

Putting down in writing the time commitment of each partner, as well as the roles and tasks to which each partner is committed, can avoid serious misunderstandings.

• NON-COMPETITION CLAUSE

It may be the case that the partners agree not to work or to be partners in another company carrying out a similar economic activity.

What types of Partnership Pacts are there?

The typologies of the Partnership Pact are not so much derived from a regulatory law as from the time at which the agreement is signed.

THE FUTURE PARTNERSHIP PACT

It is rare and is established between the partners promoting the idea before the start-up is incorporated. It is not very relevant to use the word partner when they are not yet formally partners. It is undoubtedly the least common, although it could be one of the most relevant, as it paves the way towards the incorporation of the company, avoiding movements such as the escape of partners, the creation of parallel projects, personal appropriation of means of production or project assets, etc. Circumstances that are tied up with this pact.

FOUNDING PARTNERS PACT

It is usually immediately preceding or immediately following the constitution. This pact is the most relevant for investors, practically an indispensable requirement for establishing a long-term relationship with them. It is an agreement between those who are going to be the founding partners of the Startup, and through which they will regulate matters of vital importance such as the Intellectual Property developed to date, shares in the capital, positions, remuneration, permanence, ways of dealing with the entry of new partners, etc.

NEW PARTNERS PACT

It is established after the incorporation of the company and allows new partners to join the Startup. This New Partners Pact is, in the start-up sector, with investors who close financing rounds with the start-up.

THE CONTENTS OF THE SHAREHOLDERS' AGREEMENT:

The content The purpose of such a document is not fixed, since its raison d'être is precisely that of adapt to and serve a particular regulation between the parties to the agreement. However, there are a number of rules, which tend to appear in almost all cases as they are aimed at avoiding future problems that can affect almost any start-up. Among these fundamental clauses are the following:

• Identification of partners or shareholders signatories (full name or company name, number of shares and percentage of share capital held).
• Dates of society of which they form part (name or company name, purpose).
• Regulation of the blocking situations that may occur within society.
• Clauses intended to regulate the transfer of shares or holdings in companiesThis provides stability and commitment of the partners to the start-up.
• Exclusivity clause of the partners or shareholders vis-à-vis the company.
• Pnon-competition act which prevents them from endangering the interests of society by participating in the development of a competing company or undertaking, and the consequences of breach of the pact.
• Provisions relating to the intellectual and industrial property rights that may be generated by the activity of the partners in the partnership.
• Confidentiality Agreement (NDA), which is specifically aimed at preventing outflows of sensitive company information. 
• Internal rules or code of conduct for employees aimed at regulating workers' rights and obligations. 
• Profit and loss sharing scheme agreed by the partners or shareholders;
• The obligatory nature of the membership of new partners or shareholders to the shareholders' agreement.
• Provisions relating to the breach, validity, assignment and modification of the shareholders' agreement signed.
• Pact on statutory aspects: When you want to complete, specify or modify the internal relations of the partners or shareholders and the legal and statutory relations governing them. If you want to set up a limited liability company, regulate the functioning of the company and the relations between the company and the shareholders and the basis of the internal relations of the shareholders, you must use, depending on the type of company, the articles of association of a limited companyThe articles of association of a professional limited company or the statutes of a cooperative society.

THE SHAREHOLDERS' AGREEMENTS ALSO COVER ASPECTS RELATED TO INVESTOR POLICIES:

• Do not pay dividends to members.
• Moderate remuneration in line with the company's circumstances.  
• Include a number of issues for qualified majority decisions.
• Regular reporting to investors (monthly / quarterly). 
• To have thought of an "exit" for the investor and to demonstrate it with facts (e.g. clauses in the shareholders' agreement; a % cash out in each round, contracting an M&A to sell in secondary the shares of all those who want to sell after x years).

Applicable law

The raison d'être of the shareholders' agreements stems from Article 1.255 of the Civil Code, which establishes the autonomy of will of the parties, or freedom of pacts, and, therefore, to establish the clauses and conditions that best suit the contracting parties, with the only limit being respect for the law, morality and public order. Articles 28 and 29 of the Royal Legislative Decree 1/2010, of 2 July, approving the revised text of the Capital Companies Act.also recognise the validity of these agreements and its inter-party effectiveness by declaring that reserved agreements between partners cannot be enforceable against the company, unless the company itself signs the agreement as one of the parties.

In the following link you will find the format of a Partnership Pact (+).