So, nobody is saying you need to be an expert on company shares, all their different types, variations and nuances. As a startup founder, you should just know the key basic principles of what shares are, and how you transfer, issue and manage them. This article aims to give you those principles. Of course, there is plenty more detail we could go into, but this is enough to get you through to when you raise capital.
What are shares?
Shares are the currency of ownership in your limited company.
Shares were traditionally marked by formal certificates, and it is still best practice to issue certificates to shareholders to demonstrate their ownership. However, certificates aren’t absolutely required – in the same way that you don’t need a £10 note to show you have £10 in the bank – the £10 is still there.
In theory, there are different types of shares, but almost all startups will just register their company with ‘ordinary shares’ and in all probability, you don’t need to be considering different ranks or classes of shares at a startup stage. We recommend you stick with ordinary shares.
Share Capital – This is the total amount of shares multiplied by the nominal value of each share. You choose the nominal value of each share when you register your company. Read our guide on registering your company for more info.
Nominal Value – This refers to the value of the shares when you incorporate them (e.g. £1.00, £0.01, £0.001, etc). You choose this value when you register the company.
Illustration: If you have 100 shares of nominal value of £1.00 each, then you have a share capital of £100.
Transfer Shares or Issue New Shares?
The following table shows you examples of when you can transfer existing shares and when you should issue new ones. Administratively, it is easier to transfer because you don’t need to adjust your share capital tables, but there are clear occasions where issuing shares is more suitable to avoid unnecessary taxes.
|TRANSFER EXISTING SHARES
(use Stock Transfer Form)
|ISSUE NEW SHARES
(use SH01 form)
|When gifting your shares to a family member or friend for nominal value.||When you receive investment in exchange for shares – issue shares to your investors – don’t transfer because they will likely need to pay stamp duty on top if it’s a transfer.|
|When giving your shares to a co-founder after you have already registered the Company (see more info in our co-founder guide).||When someone exercises a share option which you granted to them.|
|When giving your shares to an early stage employee after you have already registered the Company – also see the co-founder guide for this.||When you want to give someone shares in exchange for any amount equal to or more than £1000.|
IMPORTANT 1 – STAMP DUTY: If you are giving shares away for nominal value, then you can transfer shares freely. If ‘selling’ shares for more than £1000 in total, then stamp duty could be payable on the transaction by the buyer.
IMPORTANT 2 – COMMON PITFALL. If you have 1000 shares in issue and you want to issue 5% to your technical co-founder, then you need to issue them 53 shares (rounded up from 52.63), not 50 shares. 50 is 5% of 1000 – but if you issue 50 shares, then your total number of shares is then 1050, and 50 is not 5% of 1050! So you need to scale up the number of shares issued to make sure they hold the agreed percentage after the new shares are issued. Use this formula to do this (using figures from the above example):
1000 / 0.95 = 1,052.63 = 100% of shares after the new issue.
1,052.63 / 100 = 10.53 = 1% of shares after the new issue.
10.53 x 5 = 52.6 rounded to 53 shares = 5% of 1,052.63 shares.
As far as the general admin goes of owning shares in a company, here are the key things you need to do:
- File an annual confirmation statement via Companies House (where you registered your company) showing the company’s shareholdings. You should be prompted to do this by Companies House each year.
- Keep a Shareholder Register showing who owns shares in your company and when they received them – click to download our Legal Sidekick template version.
- If issuing new shares, submit your signed SH01 form to Companies House.
- If you have a shareholders’ agreement, investment agreement, co-founder agreement or special articles of association with applicable ‘pre-emption rights’ in favour of existing shareholders, you either need to comply with those rights, or ensure they are waived before doing the relevant transfer or issue.
- If issuing shares, typically you should create some board minutes to approve the issue.
- If transferring shares, just keep the stock transfer forms on file – no need to send these to Companies House.
If receiving investment at any stage, investors want to know all this is in good order, so it’s good to get into best practices from the start.
This Basic Training article was written by Legal Sidekick. Legal Sidekick is the legal platform for startups. We offer automated contracts and loads of startup legal resources and guides. For queries on company shares or generally, contact us directly.
A downloadable version of this guide is available below.