Alphabet Shares: Everything You Need to Know
18 Mar 2025In this article, our Legal Director, Rachel Duncan shares her knowledge of Alphabet Shares and how they relate to business owners, investors and employees.
Introduction to Alphabet Shares
Alphabet shares are a type of share class used by businesses that offer different rights to their shareholders depending on what class of share they’re allocated.
That way, businesses can offer varying levels of control, voting rights and dividend payouts to shareholders depending on what type of share class they hold.
As the name suggests, Alphabet shares are usually separated into Class A, Class B and Class C, all with a different level of control that allows business owners to influence the structure of their business.
In this article, we’ve delved into alphabet shares in more detail, exploring what they are, why they’re used, how they impact corporate structures and how they can be utilised by business owners.
What Are Alphabet Shares?
So, Alphabet shares are a type of ordinary share that are defined by letters (A, B, C, etc), with each type offering unique benefits, voting rights and dividend rates to shareholders.
It’s the unique voting rights, dividend entitlements and shareholder privileges that differentiate alphabet shares from ordinary shares (also known as common shares). Unlike alphabet shares, ordinary shares usually offer equal voting power and profit sharing through dividends, whereas the goal of alphabet shares is to introduce layers of control based on what type of share is allocated. In simple terms, this means that some shareholders will have different rights to others. This allows companies to offer ownership to shareholders without giving over complete control, and we’ll get onto why this is used in more detail below.
Why Do Companies Use Alphabet Shares?
If every share class was created equal, it would mean that every shareholder would have equal rights and say over what happens with the business. And sometimes, the majority shareholders don’t want that to be the case. Below are some of the most common reasons why companies opt for alphabet shares instead of other classes.
How Alphabet Shares can be used for raising capital
Allocating shares is a great way for businesses to raise capital, so Alphabet shares allow fundraising without the owners relinquishing any control of the business. This stops people from being able to buy shares in a company and suddenly have full control of the direction of travel. How’s this done? Through non-voting or low-voting shares. This allows businesses to sell shares to external investors without giving away any influence over corporate decisions.
This can stop hostile takeovers where investors buy large portions of a business and completely alter the direction of travel or worse.
There are also dual-class shares that allow certain share classes to retain a disproportionate amount of voting rights. For example, someone could own 20% of a business, but have shares set up in a way that they’re voting power exceeds 50%. This allows businesses to raise capital through external investment, giving away large portions of their company but still maintaining control. The only downside to this could be an overreliance on silent shareholders. If they made a decision that shareholders weren’t necessarily happy with, it could result in a mass selling of shares, or it could put off future investors.
An example of this was the fabled WeWork case, where the business issued dual share classes but gave its CEO outsized control, even as the business struggled financially. This quickly led to shareholder disillusionment, as there was no way to challenge leadership decisions, and ultimately, the business collapsed and the CEO was ousted.
How Alphabet Shares Can Differentiate Between Dividend Privileges
Along with affecting the voting rights of shareholders, Alphabet shares can help differentiate between dividend entitlements. What do we mean by that? First, let’s take a step backwards.
Ordinary Dividends or Common Shareholders
A dividend is a way of paying shareholders a piece of a business’s profits. How and when those profits are shared is dependent on the share class. So, ordinary or common shares generally pay shareholders that are issued Class A shares, and the amount they get is based on profits the business generates, and they receive equal payouts per share.
Fixed Dividend Preference Shares
With some Class B, C, or D shares, shareholders may be guaranteed dividend payments in order to make the share class more attractive. That way, it attracts investors who are looking for stable returns rather than voting rights. Often, preference shares are used by private or family-owned businesses to maintain control while still rewarding external investors.
Enhanced Dividend Non-Voting Shares
Often, to compensate for a lack of voting rights, non-voting shares come with increased dividend payouts to make them more attractive to investors.
Other Types of Alphabet Shares
Employee-only shares (e-class shares)
A lot of businesses are drawn to employee-only shares to incentivise their workforce. Again, depending on how they’re set up, they can separate ownership and control, meaning employees can have a stake in the business without necessarily having control in how the business is run. This is a great way to provide a financial incentive to employees, as some businesses will offer guaranteed dividends each year.
Growth Shares
Many companies, particularly start-ups, offer growth shares (AKA Exit-based shares) to their employee which essentially means when the business is sold, they’ll receive a share of the profits. This class of share doesn’t pay dividends, but is issued on the basis that employees will gain a share of the profits come-exit, making it an added incentive, particularly when large salaries can’t be offered to begin with. The only negative to employees is that until the business sells, shareholders will only receive any payment once the business sells. This is often used as reward for loyalty to a firm, but if an employee leaves before this, then they won’t be rewarded.
Key Considerations for Companies Using Alphabet Shares
Depending on what your goals are as a business, it’s important to note that regulation exists that means companies with too much of a variety of share classes may be restricted from listing on certain stock exchanges.
For any business considering different share options, a shareholders’ agreement is an absolute necessity, along with Articles of Association which outline what type of share classes are offered. This lays out everything in black and white, stating who gets what, what voting rights are dished out and what dividends are paid and when. It might be tempting for new businesses to skip this step and go on a handshake alone, but this is often where businesses fall foul years down the line if things turn sour.
So, clearly document anything you decide from a share option perspective, have it drafted by a legal professional who understands your intentions, and make sure each party and any investors understand what the chosen share class entails.
If you’re considering buying or selling shares, find out about Share Purchase Agreements here.
Conclusion
Alphabet Shares present a great deal of positive opportunities for businesses if set up correctly. It allows companies to raise funds while retaining control, and they can also provide a fantastic incentive to employees, giving them a shared sense of purpose driven by the potential financial gain they could make on the shares.
The beauty of Alphabet Shares is the flexibility, and as a business owner you can tailor what each share class offers so that it suits your needs.
As always though, it’s best to consult a legal professional if you’d like Alphabet Shares in your business, and better yet, a legal firm that also helps businesses with their finances (cough, cough).
If you’d like help with Alphabet Shares in your business, get in touch today.
Related Case Studies
Take a look below at some case studies from where our Legal Team, headed up by Director Rachel Duncan, helped our clients.
Westland Asset Case Study: How We Helped with the Acquisition of DSS Sameday Services
