Congratulations! You’ve just incorporated your company and we bet that you’re just raring to get things off the ground. However, before you do so, it’s imperative that you be clued up about one of the most important aspects in your firm’s incorporation—share types.
That’s because understanding the kind of shares you may issue in the future will carry long-term consequences when running your business and making decisions for it. This is especially if you need to raise equity financing through investors or fundraising rounds, so being versed in options when issuing shares—and how they impact shareholder rights, conditions and entitlement—will be very useful.
Ordinary shares – what your company starts off with
Most companies (especially small and medium enterprises) usually only have just one type of share. These are referred to as ordinary shares (or common shares) and are the ones that the company was incorporated with.
Essentially, ordinary shares signify equity ownership in a company proportionally with all other ordinary shareholders and is based on their percentage of ownership in an organization. As such, they carry one vote per share and that they allow their owner equal participation in the company’s dividends.
However, holders of these shares will receive fluctuating dividend payments depending on the performance of the company. Also, although ordinary shareholders have a right to the distribution assets if the company winds up or is sold, they rank after preference shares.
Different share types
Typically, many early stage businesses will have more than one shareholder, so it’s possible to issue different share types depending on the founder’s ambitions and circumstances for the business. For example, limited companies (comprising various shareholders investing different amounts of money) may issue different share types which are weighted based on what they do for their owner.
Below are the basics of shares beyond ordinary shares:
This is a subset of ordinary shares that is more restrictive since they usually carry no right to vote and prohibits these shareholders to attend general meetings. Hence, these shares are typically given to a company’s employees so that remuneration can be paid as dividends (usually for the purposes of tax efficiency for both the employer and employee) while maintaining the voting rights with directors.
Eponymously, these shares are ‘preferred’ as their owners are entitled to receive a fixed amount of dividend every year before ordinary shareholders. Holders of preference shares will be paid their entitlement every year unless the distributable reserves are not enough to pay all or even some of it. These types of shares are usually non-voting or, at most, have just one vote (but only when their dividends are in arrears).
Redeemable shares give a company the option to buy them back at a future date and is either fixed or set at the director’s discretion. Usually, the redemption price is the same as when it was issued, although it can be set at a different value.
Notably, a company can only redeem these shares out of profits or via the proceeds of a new share issue. This tends to restrict the company’s ability to redeem shares even if the directors would like to go for this option. As such, redeemable shares are usually done with non-voting shares that are given to employees – meaning that if one leaves, the shares can be redeemed at their nominal value.
Keeping track of your company’s shareholders
At Zave, we understand that now, more than ever, companies have more avenues to raise capital for their businesses, but with those also comes more complex shareholder structures. For all business owners, having a basic understanding of the different types of shares you may issue for your company is vital. However, keeping track of all of them—especially for novice founders—can be a highly daunting endeavor.
That’s why our platform was designed to work transparently and efficiently with your professional service providers on what matters to your business’s growth, while staying on top of your corporate governance. Through our Cap Table feature, we help you to keep track of all ordinary and preference shareholders—for past, present and even pending allotments.
Zave makes the management of your own compliance easier than ever, yet we go beyond that to allow your company’s other shareholders to access our platform. What this would mean is faster audits, faster investments and a significant reduction of chaos when working with those who wish to see you and your business succeed. Start a free trial to change the way you manage your corporate governance.