Make your company's share structure optimal from the start by incorporating with the correct number and type of shares.
When you first incorporate, there are two main considerations to make in regards to your shares. Firstly, the number of shares your Company should incorporate with and then secondly, the type of shares that these should be.
1) How many shares should I make when I incorporate the company?
We advise creating a manageable number of initial shares and a manageable nominal value when you first incorporate. To keep things simple when you start out, we recommend incorporating with 100 ordinary shares each with a nominal value at £0.01. Splitting this shareholding between the founders (e.g. 50 shares for each of two founders) is perfect. If you have 3 founders, 300 Ordinary shares at £0.01 per share would also be recommended as this allows for a nice equal split of 100 shares each.
The nominal value
The nominal value is a fixed value that you assign to each individual share from incorporation. This number is important in terms of how much money you'll need to transfer to the company for your initial number of shares. For example, if you had a nominal value of £0.01 attached to each of your 100 ordinary shares, you'll need to pay £1 for these. When you incorporate on Companies House the minimum price per share you can set is £0.01, which means that if you wanted 1,000,000 shares the founders would literally have to pay £10,000 for their shares.
It's therefore important that the nominal value and your number of shares issued at incorporation work in conjunction, as a high nominal value with a large number of shares could result in a hefty payment sum at an early stage.
Remember - once you have a company bank account, you'll need to actually write a cheque or do a bank transfer to pay for those shares - don't forget to do that!
After incorporation
When you get to completing your funding round, ideally you'll want to have at least 100,000 shares in issue so you can have a low price per share and fine-grained share allocation in your new round. For example, if you just had 100 shares, your price per share may be, say, £17,000 per share, meaning you can only take investments that are a multiple of £17,000 (as you can't have fractional shares), which isn't very useful.
However, using SeedLegals, you can easily sub-divide your initial Shareholding through a Share Split to ensure your Company's shareholding consists of at least 100,000 shares. A share split is essentially taking your Company's current shareholding and breaking it down to create more shares, lowering your Company's price per share and nominal value. Check out this article on how to complete a Share Split in just a few minutes.
2) What type of shares should I create when I incorporate and first start out?
You should always start by creating Ordinary shares when you first incorporate. By doing this, your shareholding structure starts as equal - the voting power shareholders get is proportional to their number of shares which promotes clarity. Some founders who have not done from the start tell us:
- their accountant told them to create A, B, C, D shares (so-called alphabet shares) so they could have flexibility in giving out different rights to different people
- Or, occasionally we'll see a founder who's given themselves special shares with 2 votes per share, or given themselves half of one type of share and half another type.
Both of these scenarios are not ideal. Whenever investors see cap tables like this, they know the founders either didn't know what they were doing, or that the founders were trying to optimise to take advantage of investors later, e.g. by giving the founders more rights than the investors. When they see that, you just made your round harder to close, and lost trust with your investors.
As a result, its best to just start with Ordinary shares, because creating those clever-sounding-at-the-time multiple share classes cause friction and most of the time need to be undone later. Later on, as you begin to grant shares to employees and investors, you can get fancy with alphabet shares, non-voting shares, preference shares and the rest. For now, your priority should be laying the foundations for clear communication between founders and investors - keep things simple!
Names of Share Classes
Broadly, you can call your shares anything you like - you could have Banana Shares if you want (though we think that's a bananas idea).
If you needed to look at the fine print in the company's Articles to find out the rights that each share class has, that would be a long and tedious process, and so instead a few industry norms have appeared:
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Ordinary shares have voting and dividend rights. These are usually the share classes the company starts out with, and which the founders own.
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A Ordinary shares is often the name given to the shares that are 'better' than Ordinary Shares, and are given to astute investors who ask for an ordinary share that also has an SEIS/EIS-compatible liquidation preference.
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B Ordinary shares (or B Ordinary (Non-Voting) shares) is usually the name given to the shares that are 'worse' than Ordinary shares because they are non-voting (i.e. they're like Ordinary shares, but no votes per share). These shares are usually given to employees, advisors and minor investors (e.g. to investors investing under, say, £5000 each).
Other Share Classes you may come across...
The vast majority of early-stage UK startups just have Ordinary shares, and maybe 30% of the time B Ordinary (Non-Voting) shares for employees and small investors.
But, as the company grows, or if you're dealing with investors or crowdfunding companies that use other names, you might come across these too:
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A Preferred shares is the name usually given to the preference shares that funds and VCs ask for. A preference share allows the fund or VC to get their money back ahead of the ordinary shares on a sale or liquidation of the company. Preference shares aren't compatible with SEIS or EIS, so you don't see them often in early-stage UK rounds, which are fuelled by angel investors looking for SEIS/EIS tax deductions on their investments.
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B Investment shares is another name for B Ordinary (Non-Voting) shares, sometimes used by crowdfunding sites.
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C Ordinary, D Ordinary, etc. shares may be created in later-stage rounds to provide particular groups of investors with certain rights - e.g. the Shareholders Agreement may say that the C Ordinary shareholders have the right to one Investor Director. But, don't go creating these share classes when you incorporate the company 'in case you need them later', because if/when you do ever need them, it will be for very specific use cases you could never have foreseen when you created the company, so you'll only create these when you have a specific use case for them.
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Seed Preferred shares is usually just another name for A Preferred shares, sometimes used by early-stage funds, sometimes to disguise the fact they're asking for a preference share!
On a related subject, here is an article to help you decide whether to give shares or share options. But before, you might want to have a look at this article explaining the difference between shares and options.