Posted on Apr 17, 2012 by |
By Dug Campbell
When it comes to sitting down to read your company’s Articles of Association, there are two types of entrepreneurs in this world – those that don’t enjoy doing it and those that pretend to. Let’s be honest – in many cases, the wording can be opaque, painful to read and full of bewildering cross-references. To the uninitiated, the document can sometimes appear to be little more than a game of mental gymnastics invented by lawyers with nothing better to do.
Over the years I’ve heard people ask whether lawyers are too fixated on the downside – the implication being that repeated experience of problems in startups causes an inclination to try to cover as many potential risks in the Articles as possible at the expense of readability. There’s an element of truth to that argument in my view. Ultimately, it’s a consideration that each commercial lawyer must balance every time he or she provides advice and, as with all things, some are better at it than others.
It can be a tough call at times when you have experience of situations where those extra few clauses have actually been the difference between success or failure and (in a few of the most extreme cases) between a fortune gained or lost. A good lawyer should be able to identify and isolate key risks for startups but you will never be able to protect against every possibility.
As a rule of thumb when considering new Articles, I’d suggest that you should view those risks that hold the potential to bring your business to a shuddering standstill in the future as the ones with the loudest claims for attention. Incidentally, you could do far worse than to adopt the same approach elsewhere within the business.
So, despite ranking low on most people’s wish list of bedtime reading matter, the Articles remain one of the most important documents for any entrepreneur to understand. But a set of startup Articles really shouldn’t be that complex.
For starters, do you know where your Articles are? If not, perhaps you incorporated the business yourself online – in that case, you’re likely to have the Model Articles in place, in full or in part. A copy of the Model Articles can be found online at the Companies House website.
However, be aware that certain key protections won’t usually be included if you are using typical ‘off-the-shelf’ documents. For example:
- a requirement to force an employee who has been sacked to transfer his shares (compulsory transfer)
- a mechanism to ensure that all existing shareholders have the right of first-refusal on any proposed transfer of shares (pre-emption on transfer)
- a mechanism to force a minority shareholder to transfer his shares on a sale of the business – preventing a situation whereby a shareholder that fails to respond to your attempts at contact prevents your Instagram-style exit for $1bn (‘drag-along’)
Each of the above situations is very real but simple to avoid by changing your Articles to include standard provisions along the lines of those above. As ever, when you’re running a startup, it is one thing to lack the funds to deal with the issue – but it’s another altogether to not act because you were simply unaware of the risks.
Hopefully, this blog over the next few months will go some way towards highlighting a few of the common issues that it’s worth considering when you’re starting up for the first time. To that end, just let me know in the comments below if you would like me to focus on specific areas – or even if you’d simply like to let everyone know that, yes, you have actually read your Articles from cover to cover...