Answer:
Your startup can secure capital by issuing two different types of shares. You can give ordinary shares or preference shares to investors. Each share gives different rights to investors. Typically, ordinary shares are the common type of share issued to founders and employees, while preference shares are issued shares to investors wanting to secure their return.
Ordinary Shares
Voting Rights
An ordinary share gives the shareholder the right to vote on matters put before all the shareholders of the company. The weight of a particular shareholder’s vote will usually depend on the ownership percentage they have in the company. Typically, one share equals one vote.
Dividend Rights
An ordinary share also provides the shareholder with the right to receive a share of the company’s profits by way of dividends. The dividend amount an ordinary shareholder receives will fluctuate depending on the company’s performance and the company’s profits.
It is at the business’ discretion whether or not it decides to pay dividends and of what amount. Ordinary shareholders will only receive a dividend payment after the company has paid any preferential dividend.
Liquidation
If a company can no longer pay its debts when they fall due (i.e. the company is insolvent), ordinary shareholders will rank last when receiving any amounts from the company.
Secured creditors will receive payment first, followed by unsecured creditors and then preferential shareholders, followed by ordinary shareholders.
Preference Shares
As the name suggests, a preference share gives the shareholder preferred treatment over the ordinary shareholders. However, preference shareholders have different rights than ordinary shareholders.
Voting Rights
Preferred shares often do not carry a right to vote.
Dividend Rights
Preferred shares carry a right to a priority dividend. The dividend rights of preference shareholders will be set out in a company’s governing documents.
Often, companies pay dividends to preference shareholders as a fixed percentage. Fixed dividends allow the preference shareholder to have more certainty over their investment as they receive their fixed dividend before the ordinary shareholders receive any dividend payment.
Liquidation
If a company is insolvent, preference shareholders have priority over the ordinary shareholders to recover their investment funds back. This is often called a liquidation preference. This is a driver for investors wanting startups to issue preference shares rather than ordinary shares. They want assurance that the company will reimburse them before ordinary shareholders, which typically includes the founders.
Key Takeaways
If you need assistance securing capital for your startup, contact LegalVision’s startup lawyers on 1300 544 755 or fill out the form on this page.
