Are you sick of eating baked beans while pouring all your hard earned savings into your start-up? Are your family and friends hiding from you in fear that you will ask for more money to feed your hungry business? Is the direction of your start-up growing so quickly that you need financial assistance from third party investors to reach the next stage? If you answered yes to any of these questions, then you may consider turning your attention to third party investment for your business.
There are different ways in which you can fund your startup. One way is through equity financing or financing your business by issuing shares in the company. In exchange for money, the investors (shareholders) receive shares in the company. Issuing shares in your company means that you are giving up full control in your company and will share with others in the profits and success. You can issue different types of shares in your company, for example, ordinary shares and preference shares.
When Would I Choose to Issue Ordinary Shares in the Company?
Ordinary Shares have voting rights attached to them which allow the shareholder to vote on matters affecting the company with the other shareholders. If the company is going well, they may receive dividends from the company. Ordinary shareholders are typically the founders of the company, their friends and family.
When Would I Choose to Issue Preference Shares in the Company?
As the name implies, preference shares give the shareholder preferred treatment on certain matters, including receipt of dividends and a priority right to repayment of their investment if the company goes into liquidation. Dividends on a preference share are usually fixed meaning a preference shareholder receives the same dividend rate, unlike an ordinary shareholder whose rate will vary. This security aspect of preference shares then makes them more attractive to investors.
A preference share also takes priority over ordinary shares should the company, unfortunately, enter liquidation. In a liquidation, the preference shareholder’s ability to recover its investment from the company will rank behind the creditors of the company but will be ahead of the ordinary shareholders. Preference shares may or may not have voting rights and may be convertible meaning they may be transferred into ordinary shares.
Preference shares offer the investor a steady income stream from the fixed dividends along with some protection over their investment. However, depending on the terms of the preference share, they can sometimes be converted into ordinary shares at a future time or on the occurrence of a future event. Generally speaking, professional investors will want to have preference shares rather than ordinary shares in startup companies. If you would like any more information on the different types of equity financing as well as any other options for funding your business, get in touch with our startup lawyers on 1300 544 755.