Question: When Would I Issue Ordinary and Preference Shares in my Startup?Answer:
If your startup if growing quickly, you may consider third-party investment. One way you can fund your startup is through equity financing or by issuing shares in the company. You can issue investors with different types of shares in your company. Below, we explain when you would issue ordinary and preference shares in your startup.
When Would I Issue Ordinary Shares?
Ordinary shares are the most common type of share. Voting rights attach to ordinary shares which allow the shareholder to vote on matters affecting the company. If the company is making a profit, they may also receive dividends. In the event of a liquidation, ordinary shareholders are entitled to receive their initial investment after the company has repaid any preference shareholders.
Startup founders usually have ordinary shares. Where possible, they would then want to issue ordinary shares to investors (as opposed to preference shares) to ensure that no one has shares which take priority over theirs.
When Would I Issue Preference Shares?
Preference shares give the shareholder preferred treatment on certain matters, including:
- the right to receive dividends; and
- a priority right to repayment of their investment if the company goes into liquidation (also known as a liquidation preference).
Preference shares typically have voting rights and may be convertible, meaning they may be transferred into ordinary shares.
This preferential treatment makes preference shares more attractive to investors as they offer greater protection for their investment. Sophisticated investors will often insist on the startup issuing them with preference shares. Depending on your bargaining power, you may find yourself with little choice but to issue preference shares.