Types of Shares and How to Allocate Them24 Sep 2017
Classes of company shares
When a business allocates shares it allocates them in different classes with different rights associated with each class.
Shareholders can be owners, directors, investors and employees. Different share classes allow for flexibility in types of ownership, can present different ways for businesses to encourage particular investors and enable businesses to offer shares as benefits to employees.
There are a range of share types to choose from when allocating yours. The most common type are standard ordinary shares which provide all ordinary shareholders with rights on questions of voting and dividend payments depending on the percentage shareholding they have.
However, it should be noted that not all ordinary shares follow the same format. They can be issued as “non-voting” which remove the capacity for certain shareholders to vote on items such as the future direction of the business. These are often used for employees as part of their benefits package and also family members of who have been appointed as shareholders for tax reasons.
Preference shares, whilst usually non-voting, provide shareholders with dividend payments at a fixed percentage of profits, whilst ensuring priority on return of capital in cases of winding up.
Redeemable shares are another popular option, particularly for growing businesses, as they allow companies to buy back shares at a later date. These are good for businesses who wish to obtain funding in the early stages but would like the opportunity to regain ownership when the company has its own funds.
Management shares serve as a way to offer increased power to shareholders. The most common method of achieving this is by offering extra voting rights, rather than monetary, often by offering multiple votes per share, or selling a higher number of ordinary shares at a lower price to ensure particular shareholders carry the necessary weight in voting and decision making.
How to allocate shares to directors and investors when opening a company?
How you choose to allocate shares to directors and investors largely depends upon how much control or ownership you wish to hand over to them based on their input or investment.
It can be beneficial to allocate voting and management shares to smaller groups of directors and owners and allocating non-voting or redeemable shares to wider groups whose potential involvement in the business is initially unclear. This is a useful way to avoid conflict over shares and returns.
In a small business environment shares can be offered to employees as attractive non-monetary bonuses to bring talent into the organisation when the business cannot afford larger salaries, this also helps with workforce loyalty. These would be non-voting shares.
When considering personal investment in return for shares in the business thought must be given to problems which come as the business grows and variables change.
Non-voting shares allow you to recognise investors financially without ceding important control over your business, which you may prefer to keep in the hands of a smaller number of directors.
By diluting shares you may overcome outside forces exerting too much influence over the direction of your business. By allocating new shares and diluting the pool, those funding your business can gain an important seat at the table, without gaining undue influence over its future direction.
Due consideration must also be given to the power for directors to themselves allocate shares to others. This must all be outlined in your company’s articles of association, and will play an important role in shaping the future of your business.
Sharing the Burden
How much control you wish to hand over to directors and investors is for you to decide however, doing so is no easy task.
Whether you want to allocate share to investors to gain funding, to employees as benefits or to family members to benefit from tax free dividends seeking advice from accounting and legal professionals ensures your business is protected.
In our Guide to Shares and Shareholders, we dive into some of the issues mentioned in this article in more detail.