Nobody is expecting you to be an expert on company shares, all their different types, variations and nuances. As a startup founder, you need just to know the key basic principles of what shares are, and how they are issued, managed and transferred. Of course, there is plenty more detail we could go into, but this is enough to get you through to when you raise capital.
You can transfer shares to a co-founder in the very early stages of the company (i.e. before you have really started), or to someone who is buying them from you (e.g. selling your company or part of it), or to a family member or a family trust. Note though that with investors, unless they are buying your shares from you personally, they would invest their money into the company's bank account and be issued new shares.
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What are shares?
Shares are the currency of ownership in your limited company.
Shares were traditionally marked by formal certificates, and it is still required/best practice to issue certificates to shareholders to demonstrate their ownership. However, if someone doesn't have a certificate, it doesn't mean they don't still own the shares – 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.
Generally, 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. In fact, it's simpler and easier (and generally therefore better) to 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.
How to transfer shares easily
To transfer shares, you complete a stock transfer form and then issue the new shareholder with a share certificate (and you can adjust your own share certificate too to reflect the change too).
You can inform Companies House of the transfer when you submit your annual confirmation statement to them - which could be months after the share transfer.
When transferring shares, make also sure that:
If there are conditions attached to the transfer:
For a transfer to family member or friend, you may need to establish that their shares will not carry any voting rights, and it is just a gift in case the company is sold in future. You can do this with a simple letter signed by both parties.
For a transfer to a co-founder, you will need your co-founder agreement to establish what happens to the shares if the co-founder leaves the business.
For a transfer to a purchaser of your company, you will need a more detailed share purchase agreement to establish the terms of the sale.
Where there are conditions, these conditions should be inserted in a document and signed by both you as the transferor, and the new owner of shares as the transferee.
When you already have a shareholders agreement with investors, if there are restrictions on transfers, such as ‘pre-emption rights’:
A pre-emption right is a right of first refusal of an existing shareholder (to pre-empt something).
In the case of a pre-emption right on share transfers, this usually means the other shareholder has a right to buy your shares at a no less favourable rate than what is being offered to the other possible buyer. Ultimately, you are not forced to sell, but if you want to sell, the existing shareholder has the first right to refuse the opportunity to buy on the same terms offered to any other person, before any other person can do so.
The quickest way to avoid any issues with this is to ask the existing shareholders to waive their pre-emption rights, using a shareholder resolution to waive pre-emption rights.
Pre-emption rights on transfers exist in most investment agreements and shareholder agreements, so if you have one in place, then check this first.
Pre-emption rights usually don’t apply when making transfers to close family members – these are usually referred to as ‘permitted transferees’.
Ensure you consider whether the transfer is freely permitted, and whether you should sign any agreements before making the transfer. Once done, the transfer itself is very simple using the stock transfer form.
This articles was written by Legal Sidekick. Legal Sidekick is the legal platform for startups. We offer automated startup contracts and loads of startup legal resources and guides. For queries on company shares or generally, contact us at firstname.lastname@example.org