Here we'll explain what sub division is
Most customers who join our platform sub-divide their share structure when they join.
What is sub-division?
Sub-division is a term that describes what happens when you create more shares in your company without needing to input more capital.
Most companies are formed with 1, 10 or 100 shares, typically at a nominal value of £1 each. So, for example, a company with 10 share of £1 nominal value each has a total capital in the business of £10.
When you sub-divide, you increase the number of shares in the business, but the capital stays the same. So, in the example above, if you had 10 shares of £1, and sub-divided by a factor of 100, you would end up with 1,000 shares of £0.01p - the same total capital of £10 as you started.
Every shareholder in the company is equally affected, so all the same relative percentages of ownership exist after the sub-division.
Why does a company sub-divide its shares?
The main reason a company does this, is so that its equity is a more easily manageable currency.
In the example above, with only 10 shares, if the company wanted to give a new employee a share in the business, the smallest amount they could give them would be 1 share, or 10% of the business.
Equally if they were going through an investment round, with numerous investors giving slightly different amounts of money, it is important that they get a fair share of the business reflecting their exact investment level, not 10%, 20% or 30% !
How many shares should a company have?
For the reasons outlined above, it is helpful if it is high enough to be able to split further share issuances into quite small amounts, to allow relative contributions to be exactly rewarded. In our experience, a common number to sub-divide to is 1,000,000 but we have also seen anything from 100,000 to 10,000,000 being chosen by a particular company.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'