SUB CATEGORIES OF Funding Your Startup

A voting agreement is an agreement that effectively pools the voting rights of a number of shareholders, such that the trust will vote as a group rather than individually. As is the case with most trust arrangements, a trustee will appointed to make decisions as to how the shares will be voted. These are also known as voting proxies, and are quite common in large corporate settings where individual shareholders often divest their authority to vote to others. Voting agreements are created by a legal document, which typically specifies a termination date for the arrangement, or at the very least conditions under which the voting trust arrangement will come to an end.

There are a number of benefits relating to voting agreements, namely the added leverage associated with a voting block. Whereas individually, shareholders may not have very much power, collectively their vote may command substantially more influence. Furthermore, shareholders are often not particularly interested in making informed voting decisions, and merely wish to invest passively. In such circumstances, a voting agreement allows shareholders to allow others, who are in a better position to make an educated decision, to vote shares on their behalf.

Of course, with the benefits of a voting agreement there are also a number of disadvantages to be mindful of when entering into such an arrangement. Clearly the most obvious of potential difficulties associated with voting arrangements is the danger that those who temporarily divest their right to vote may not be adequately represented by the trustee that votes their shares. For this reason, it is important for parties to voting agreements to ensure that their interests are properly aligned with the trustee of the voting trust. Furthermore, there are legal complications that arise relating to voting trusts depending upon the laws of the jurisdiction to which the corporation is subject. Many states do not permit a complete separation between the ownership of shares and the right to vote, and a voting trust may be declared invalid under certain circumstances.

In short, voting agreements can be extremely useful devices when it comes to effectively leveraging shareholder power. That said, there are a number of potential complications that can arise, and it is important to be mindful of these limitations.