Legal structures and share distribution don’t necessarily rank high on the league table of what excites people about starting a business. But getting these issues straightened out early could save you a lot of admin, not to mention pain, later on. Putting in the leg work now and getting the corporate governance advice you need to move forward and put the necessary agreements in place will stand you in good stead to progress.
What are shares?
A share is simply a slice of an organisation, the ownership of which is allocated to an individual or individuals and enshrined in law.
Most companies in the UK are limited by shares. In other words they are owned by shareholders, who might have decision-making powers, receive dividend payments and in most cases can sell shares at a later date, either when they exit the business or in order to secure growth capital by bringing in investors.
All limited companies have at least one shareholder, but there is no upper limit on numbers and some businesses are owned by hundreds or even thousands of individuals and organisations.
How many shares should I have in my company?
In the beginning, the role of shares is to allocate a percentage of the business to each owner. If you’re working alone, then you might have 100 per cent – or one share; if there are three partners then shares might be split three-ways.
There’s a lot to think about when you start a business, so it’s a good idea to keep things simple. Many businesses start life with either 10 or 100 ordinary shares valued at either 1p or £1 each, perhaps split 50-50 between two founders – a husband and wife team, for example.
If there are three founders, it makes sense to create 300 shares, because this number is easily split three ways.
Essentially, you are giving each founder or backer their appropriate stake in the business. Ordinary shares are perfect for this simple task because there is no complicated maths, fiddly rules, or awkward accounting.
For most start-ups, share distribution is a straightforward step in the process of business formation. Many business owners forget about it until they come to pay dividends, sell-up or pitch for equity investment.
Different types of shares (selected)
Sometimes, founders want to create share structures that give some owners different rights to others. Alphabet shares are tiers or classes of shares that stipulate this point of difference.
One type might give dividends but preclude voting rights, another might have more decision-making clout and so on. These shares are labelled using the alphabet (Ordinary A, Ordinary B, Ordinary C), hence the name.
For the average business, its best to stick with a basic share structure. Not only are alphabet shares complicated, but they also send a message to investors that the owners are perhaps not a cohesive team of equals.
The holders of preference shares get a slice of profits before those holding different types of shares. They will also be the first beneficiaries of available money when the business is either sold or wound up. This share-class often comes without voting rights.
Management shares give greater voting rights to their owners but may have a lower value than other share-types. Owners and senior team members often use these to retain control of a business when newcomers buy shares.
In general, shares can be loaded with a diverse range of attributes, powers, and benefits. But, again in general, these mechanisms are more suited to larger, more established businesses with complex ownership structures.
If you are just starting out, then simpler is almost always better.
How to issue shares as a start-up
Once you have agreed the number and type of shares you wish to distribute, you must log this information with Companies House, either when you incorporate your business or very soon after.
Shareholders can be added or withdrawn at any time, as long as the information held by the authorities is kept relevant and up to date.
You can register share allocation directly or through one of many company formations services, which will log shareholdings and register your business in return for a fee.
A typical service will supply you with all relevant documents, including the certificate of incorporation, articles of association and copies of share certificates.
If you would prefer to do this yourself, then you should take the following steps:
Obtain a written agreement between shareholders
Once you have agreed the share structure of your business and the number of shares that will be owned, put this arrangement in writing and have it signed by all parties.
If the structure is agreed at a meeting, take minutes and file these with the company’s statutory records along with a joint resolution that all parties entered into the shareholders’ agreement willingly.
Many start-ups forego this step, assuming that all the involved parties are rational and have good intent, but it provides an extra level of security if founders have a disagreement later on.
Register share structure with Companies House
You must fill out the Companies House SH01 form, also known as a ‘Return of allotment of shares’ form. This document gives notice of your share distribution after your business is incorporated.
You can complete the form using the Companies House online service, or print off the form and enter information offline. Note that it takes longer to process paper forms sent via the post.
The form requires you to input basic information, including company details, allotment dates and the number and class of shares allocated. It also asks for a statement of capital, which describes the value of shares allocated to each holder.
This form must be completed and filed within a month of the shares being allocated.
The value of your shares
There is a difference between the nominal value of your shares and the market value. The latter figure will increase or decrease with the fortunes of the business.
The number of shares you own could change too as the business develops, for example, if you go through a funding round. In this case, you’ll likely do a ‘share split’, in which you might increase available shares to 100,000 shares or more in order to account for the influx of cash and to reward investors with the appropriate number of shares.
This is a problem for later in the business’ lifecycle, however, and in most cases it’s a nice problem to have. But keeping your share structure straightforward in the early days will make the process a lot easier as your business grows.