Understanding preferential shares and why investors want them.
If you’re preparing for an investment round, your potential investors may have requested that they receive preferential shares in return for their capital.
This is because, to put it bluntly, they’re investing large sums of money in the business, and want to protect their capital as much as possible.
And one way to do this is to request the shares be issued from a preferential share class. This preferential share class may have preferred rights to capital in the event of a winding up – meaning that the investors can claw back some of their capital should the company fail.
As a founder, you may think that you too deserve preferred shares. But the argument usually goes that while founders put more time and effort into the business, investors put more money into it, and have a smaller say in the day-to-day operations.
Of course, it’s in everyone’s interests that the business doesn’t fail, but it’s a possibility that investors are well aware of.
So, before you get into the negotiations, it’s important to understand the above – and not get caught up in the fact that your investors may demand preferred shares as part of the deal.
What class rights do investors usually want?
If it’s a company’s first investment round, it’s likely that it will only have one share class. In this case, investors will want preferred rights to capital on a liquidation or winding up.
They may also want voting rights so they get a say in key operational and governing decisions.
This isn’t a bad thing though, as it shows your investors are serious about your business and will likely be more engaged in its progress.
Negotiating over share class rights shouldn’t make or break your funding round. While it is an important step that will most likely be required, the equity stake taken will impact your own interests and overall ownership percentage more than varying class rights.
How do I create a new share class?
Simply contact us to start the process for you, then you can create it on Vestd and select the share class particulars such as its rights to capital, voting and dividends.
Read our guide on share class particulars to learn more about the different rights share classes can have.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal or financial advice.'