What are shares?
Every limited company in the UK is split into a certain number of shares, as decided by the directors on incorporation of the company.
These shares and details of their holders are kept by the company in a share register, which is often referred to as the ‘cap table’.
A company can have any number of shares (literally). The holders of these shares then have certain rights, as laid out by the Articles of Association of the company. The Articles also determine how the company is run and how its income and assets are split.
The number of shares you own out of the total number of shares that exist typically defines the percentage of the business that you have rights over (if all shares are pari-passu Ordinary shares).
What does nominal value mean?
At the time of incorporation, the directors determine the nominal value of each share, which the shareholder must pay to the company. Again, this nominal value can be literally anything, but typically ranges from £0.000001p per share to £1 per share.
As time progresses and more of these shares are issued, they’ll have the same nominal value but may well be issued at a premium to that, reflecting an increase in the overall value of the company.
What types of shares are there?
There are a number of different share types people talk about, but the great majority are variations of two:
● Ordinary shares
● Preferred shares
It’s also worth mentioning Growth shares, which aren’t quite as common but have some interesting characteristics.
Within these share types, you may see a number of varying ‘classes’ with minor differences (like Ordinary A, Ordinary B, etc), which we deal with in the last section.
Ordinary shares
Ordinary shares are what most people have. At their simplest, they give the holder of each share the same rights to dividends, capital and voting in the company (this is sometimes known as "pari-passu", ie they are all the same).
Many companies are founded with and issue only Ordinary shares.
Preferred shares
Preferred shares (often known as ‘prefs’) typically give their holders rights to specific dividends ahead of all Ordinary shareholders, and also give them rights to a specific amount of the capital at a winding up of the company ahead of any Ordinary shareholders.
As stated above, companies normally just have Ordinary shares, so all shareholders have the same rights to any value created by the business, whether it succeeds or fails.
When seeking additional investment in the business, however, it may well be that new (or existing) investors may only be willing to put in money if they have a preferential right to the cash flows from the business. These would be Preferred shares.
Although this may seem unfair to the existing shareholders, if that’s the only way the company can get additional funds to allow its expansion or survival, the ordinary shareholders may well vote to accept such a change. This then gives them a better chance of seeing a return on their existing shareholding than if there were no new investment at all.
Growth shares
Growth shares are just like ordinary shares but are issued at a ‘hurdle price’ that represents the value of the company at that time, and only share in the capital appreciation (its growth in value) in the business from that point on.
These can be issued out at nominal value (such as £0.01) to new shareholders without incurring any income tax for the recipient, and will only be liable to capital gains tax on any sale.
Voting or nonvoting shares
Although the standard approach is that all shares have equal voting rights, it’s very common that certain classes of the shares don’t. This may be to ensure that voting control sits with a certain section of the shareholders or maybe to limit the administrative burden of dealing with numerous shareholders in a particular class.
Dividend rights
Again, usually all shares have equal rights to dividends, but it’s not unusual that certain classes will be excluded from them for a particular reason.
How can I sell shares?
There is a fundamental difference between shares in a listed company that is quoted on a stock exchange, and one that is not.
If a company is listed (for example on the London Stock Exchange) then it is almost always possible to sell your shares at the prevailing market price at the time (less any commission due).
If the share are in a private, unlisted company, however, you may not be able to find a willing buyer. Typically these shares are regarded as “illiquid” in that there is not a ready market for them.
It may be that one of the other shareholders is willing to buy the shares off you, at a price that you would need to agree, or that a new investor will buy your shares. It is more likely that you will only be able to sell the shares when the company has an “exit”, which is is typically either when it is acquired or has an Initial Public Offering (IPO) and joins the stock exchange as a listed company.
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