When you incorporate your company on Companies House, you need to decide what type of shares to create, what rights they should have (voting, dividends), and how many shares to create.
Here's our definitive guide on what to do, and what not to do, when incorporating your UK startup.
WHAT TO DO
Keep it simple!
- 100 Ordinary shares at £0.01 per share, split between the founders (e.g. 50 for each of two founders), is perfect.
- If you have 3 founders, sure, 300 Ordinary shares at £0.01 per share allows for a nice equal split of 100 shares each.
WHAT NOT TO DO
- Some founders 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.
These are bad. 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. So, 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.
YOU'LL NEED TO DO A SHARE SPLIT LATER
It's worth noting that you'll typically want to have 100,000 to 1,000,000 shares ahead of your first funding round, so that your price per share will be a few Pounds each (if you just had 100 shares, your price per share may be, say, £17,000 per share, meaning you could only take investments that were a multiple of £17,000 (you can't have fractional shares), which isn't very useful.
The bad news is that 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. So, instead, the norm is to start with 100 shares at £0.01 or £1 each, so the founders just need to write a cheque to the company for £1 or £100 in total. And, you now instead get to your 100,000 or 1,000,000 by doing a share split later, which you can do on SeedLegals in a few minutes, for free.
SHARE CLASSES... WHAT'S IN A NAME?
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:
- Ordinary shares have voting and dividend rights
These are usually the share classes the company starts out with, and which the founders own.
- 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.
- 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).
Don't create shares or share classes until you need them.
Shares have to be owned by someone (the company can't hold its own shares). So it makes absolutely no sense to create 5 different share classes on Companies House when you incorporate your company 'just in case you want them later'. If you don't have an owner for them now, don't create them! Creating more share classes just leaves you a legacy of 'stuff' that has to be dealt with in your legals later, increasing the cost to everyone, and slowing down your funding round.
Keep it simple.
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:
- 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.
- B Investment shares is another name for B Ordinary (Non-Voting) shares, sometimes used by crowdfunding sites.
- 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.
- 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.