If your company needs more money to effectively run the business, you may want to consider issuing shares. By issuing shares, you are ‘creating’ new shares for shareholders, so they can partly own your company. While this is a great way to finance a growing business, it can be difficult to understand what youhave to do to begin this process. This article will explain the different ways that your company can issue shares.

Share Issue vs Share Transfer

While issuing shares and transferring shares sounds similar, there is a key difference between the two. Issuing shares creates new shares. In comparison, a share transfer moves existing shares from one shareholder to another. 

For example, say there are two shareholders in XYZ Pty Ltd – Bob and Jane. They each own 100 shares in the company. As the total issued share capital is 200 shares, they each own 50% of the company. The table below outlines what will happen if a new shareholder joins the company, either through a share issue or a share transfer.

Type of Shares Share Sale/Purchase Outcome Value
Share Issue A new shareholder (Tom) purchases 100 new shares at $10 per share.

Bob, Jane and Tom will each have 100 shares with a total of 300 shares in the company. 

This means they each own 33.33% of XYZ Pty Ltd.

XYZ Pty Ltd receives $1,000 from Tom
Share Transfer Bob sells 20 of his shares to Tom for $10 per share.  There are now three shareholders: 

  • Jane with 100 shares (50% of company); 
  • Bob with 80 shares (40% of company); and 
  • Tom with 20 shares (10% of company).
Bob receives $200 from Tom for his 20 shares.

When Should My Company Issue Shares?

You should consider issuing shares for your company if you need more funds to grow. More specifically, you might want to consider issuing shares if you are in any of the following circumstances:

Company Growth

If you are looking to grow your company, you might decide to reach out to investors, such as:

  • family and friends;
  • angel investors; or
  • venture capital firms.

In return for providing funds, the investors will have part ownership in the business.

Sole Trade Expansion

If you are a sole trader and are deciding whether to onboard a co-owner in the business, you may want to issue them shares. This can be very helpful as it will:

  • provide your business with more funding; and 
  • incentivise your co-owner.

Option Holders

If you have granted someone the right to buy or sell shares in your business, this person is an option holder. 

For example, you may have decided to include this right within your contracts with employees.

If the option holder chooses to exercise this right to buy shares, you will need to issue them. 

Trigger Event

Within agreements such as a convertible note and a simple agreement for future equity (SAFE), investors will provide funds to your company and, in exchange, you will issue shares to them when a trigger event occurs. 

A trigger event is generally the close of a capital raise. When the trigger event occurs, your company will need to issue shares to the investor.

How Can You Issue Shares

There are four stages to a share issue.

1. Assess the Capital

You will need to assess the amount of capital you require to grow your business. Then, you must decide whether you wish to issue shares to fund your next project. 

Generally, you will need to notify existing shareholders of your intent to issue shares. This is because shareholders will have the right to purchase these new shares before you attempt to sell them externally. This right is known as a right of first refusal. if shareholders waive their right to first refusal, you should document this in your company minutes.

If existing shareholders choose to waive their right to purchase the new shares on offer, you can then seek investment from third parties.

2. Negotiations

Your company will then need to enter into commercial discussions with the new shareholder. When raising capital, negotiations will typically be formalised using a term sheet. A term sheet is a non-binding document that sets out the key terms of the issue, such as the:

  • price per share; and
  • total amount the company is looking to raise. 

3. Agreement

The terms of purchase should then be formalised in a legally binding agreement. Investors in a capital raise may request a subscription agreement which sets out the terms and conditions of their investment. 

For example, the amount of funds invested and the number of shares they will receive in exchange.

In other circumstances, the agreement might be a:

  • convertible note;
  • SAFE; or 
  • option agreement.

4. Administrative Steps

In return for the funds, your company must take administrative steps to issue the shares. First, you must prepare a share application form which incoming shareholders will sign to: 

  • subscribe for shares;
  • consent to your company’s constitution; and 
  • authorise that their details be recorded on the company’s register.

You will then need to prepare a share certificate and update both your internet register and ASIC within 28 days of the issue.

Tax Implications

As a starting point, any individual shareholders must pay tax on income they receive on an annual basis. Some shareholders, such as a co-founder or a family member, may be offered shares at a price below market value. 

Market value is the price that ordinary people within the market pay for the shares. 

If a person buys the shares at a price that is less than market value, the discount they receive forms part of their income and is taxed at the marginal income tax rate

Therefore, from a tax perspective, it may be best for individual shareholders to pay market value, rather than the shares be accounted for as part of their income.

Key Takeaways

As a business owner, it is crucial that you know how to issue shares if you plan to grow your company. Knowing exactly when you should issue shares and how much you should issue will depend on the particular circumstances of your business. If you would like more information on how to issue shares, contact LegalVision’s capital raising lawyers on 1300 544 755 or fill out the form on this page. 

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