You want to reward your team by giving them equity in your startup, especially when at the beginning, the wages are often low. This can be done in one of two ways:
- give them the shares today, or
- give them the right to purchase shares in the future - i.e. share options.
If the choice is shares (as opposed to options, which we cover elsewhere), then the question is how to best do that.
In most cases, the easiest and most tax efficient way to give shares to a new co-founder or other team member is to issue new shares. Allocating new shares is faster and involves fewer hurdles than transferring shares out of the founders’ existing holdings.
For example, if you own 100 shares in a company (let's say those are the only shares), and would now like to give your co-founder 50% of the business. So, rather than transferring 50 of your shares, it’s easier to issue 100 new shares to them. You'll still have the same % ownership in the company, but will have achieved it with less hassle.
Important: This method only applies if the shares still have zero value. If you've done a funding round, or the shares clearly now have a value, then giving someone shares may create a capital gains tax issue for them, and using Gift Hold-Over Relief to transfer your shares may be a better option (or giving them share options instead of shares). Contact us for details.
So, if you intend to give equity to a new co-founder or other team member, it’s best to do this prior to your funding round, rather than during or after. Why? Firstly, investors like to know who is in the Company when handing over their well-earned cash and more importantly that they are not going to get diluted. And secondly once your funding round is complete, any future allocation of new shares will likely be subject to a number of limitations, due to what was negotiated in your articles of association and shareholders’ agreement. This means that allocating new shares may need the consent of your investors, who may or may not agree to it.
The process of allocating new shares is quick and easy.
In order to allocate new shares in your company, you’ll need a Written Resolution (here is a template of a Written Resolution). This document gives the directors permission from the shareholders to create new shares in the Company.It’s signed by the current shareholders.
In some cases, you’ll also need to circulate an Investor Consent Notice.
- If you are pre-funding, there’s no need to worry about this so long you and your fellow shareholders are all in agreement. However, if you have investors, then it may be necessary to have a signed document which proves that your investors have consented to the additional allocation of shares before passing it over to the shareholders for their Written Resolution.
Then, once you have all of your permissions in place, you’ll need to fill in an SH01 form.
- Ensure that you have all your relevant company information, and then follow our quick step-by-step guide to ensure every box is filled correctly!
- Once this is done, send both the SH01 and Written Resolution to Companies House, so that it is valid and filed on the public record. This can be done by post or online, if you are registered for online filing.
Lastly, you’ll need to create and sign a new Share Certificate for your new co-founder or other team member.
- You can do this by creating a new Historic Round in the SeedLegals cap table which then automatically updates your share register and generates a share certificate for the new co-founder or other team member.
Don’t forget, if you have allocated these shares from any pre-existing option pool, you will need to decrease the number of shares in the option pool on your cap table too.
That’s it. Follow those steps, and you’ll have your shares allocated in no time!