Share Allocations – How Do They Work?
Not sure what all those codes mean when trying to choose which class of shares to issue? Have a read to see what they mean.
So you’re ready to set up your company and are now up to share allocation – this is a key step in allocating the rights and liabilities of shareholders in your new business. There are different classes of shares that you can allocate, so we’ll explain a few of them here and what they mean.
How many shares?
A listed company needs at least one share, but there is otherwise no other minimum or maximum number. If you’re starting out small, it may be good to issue a number of shares that is divisible by both an odd and even number of shareholders – 120 is a number typically used.
ORD – Ordinary Shares
These are the most commonly-issued shares, and are relatively straight-forward; they will give the shareholder the following rights:
- Right to get notice of a general meeting
- Voting rights
- Right to a distribution of surplus assets if the company winds up.
D, E and F Ordinary Shares
These ordinary shares do not have any rights except to receive dividends, as determined by the company (so the company may choose not to issue dividends in any number of periods).
FOU – Founder’s Shares
These are basically shares that are issued to the founders of a company – they act like ordinary shares, with some special features:
- the vesting period can begin immediately (ordinary shareholders must wait some months or years before their shares begin vesting)
- Negligible par value (little upfront payment)
- Accelerated vesting
REDP – Redeemable Preference Shares
These shares can be redeemed for cash at any time, but at the company’s discretion. Usually there will be a vesting period of some months or years – that is, one would normally have to hold the shares for some time before being able to accrue any additional rights. As for any preference shares, any pay outs to these types of shares occurs in priority to ordinary shareholders.
NRP – Non-redeemable Preference Shares
These shares cannot be redeemed during the lifetime of the company; instead, they can only be redeemed once the company goes into liquidation. As with any preference share, they will be paid out in priority to ordinary shareholders.
CUMP – Cumulative Preference Shares
Similar to redeemable preference shares, except dividends will accumulate where the company does not have the profit to pay out in a given period – an arrears will exist until the balance is paid off to these shareholders.
Seek professional advice
The above brief introductions to the share classes are not definitive – if you think they might be something you want to consider, you should seek professional legal or accounting advice. Otherwise, ordinary shares are the most commonly issued, no matter the size of the company.
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William is a Paralegal, working in our content team, which aims to provide free legal guides to facilitate public access to legal resources. His interests lie in public law, in particular constitutional and administrative law.