A brief overview of dividends, why companies pay them, and how to pay your shareholders dividends.
What are dividends?
Dividends are a form of payment from a company’s distributable profits or cash reserves to shareholders. Dividends can be seen as an income stream to shareholders for their investment in the company.
They’re typically paid annually – once the end of year accounts have been drawn up – or for publicly traded companies, every quarter after earnings reports are released.
You can distribute dividends as often as you want to, assuming the profits are available in the company. For example, startups and early-stage companies often pay founders and directors using dividends as a way to top up their compensation package.
What share classes can receive dividends?
In short, all share classes can receive dividends. But it depends on the company’s articles of association and the particulars of each share class.
When a company is incorporated, it adopts the model Articles of Association, which gives all share classes equal rights to dividends – this is what’s meant by pari-passu, all share classes have equal rights to voting, capital and dividends.
When all share classes are pari-passu, dividends are distributed equally amongst all shareholders on a per-share basis.
So if a company is distributing £10,000 in dividends, a shareholder who owns 50% of the company will receive £5,000, a shareholder with 25% will receive £2,500 and so on.
But companies can amend their Articles of Association or share class particulars to create differential share classes, which will then mean the rights to dividends are determined by the particulars of each share class.
If a company has a preferential share class, then by definition all share classes are no longer pari-passu (equal). Dividends will then be determined by the particulars of each share class.
An example of this is what is commonly known as alphabet shares. This is where a company may have class A and B shares, and each class has dividends rights as determined by the board from time to time (i.e. the class A shares can be given more than class B, and vice versa).
Dividends are still paid on a per-share basis evenly in each class, but the percentage of how much is given to each share class is determined by the board.
Can growth share classes receive dividends?
As growth shares are a class of Ordinary shares, depending on the particulars of the growth share class, they can indeed receive dividends.
If your company is using the standard Vestd Conditional Growth Share clauses, or has adopted the standard Vestd Articles of Association, both Vv and Vn growth share classes have rights to dividends.
Whilst the growth shares are unvested and still have the conditions attached to them, the board can decide on an individual basis whether they receive dividends or not.
However, once the growth shares have vested and in turn become unconditional, they have to be treated like all other classes – meaning all holders of unconditional growth shares in that share class must receive equal amounts of dividends.
What about option holders?
Options are slightly different as they aren’t ‘real’ shares until they’re exercised. So option holders don’t receive dividends until they have exercised some or all of their options and become shareholders.
Then, if their class of shares has rights to dividends, they can receive dividends just like everyone else.
How do I pay my shareholders dividends?
As dividends must come from company profits or cash reserves, there is a maximum amount you can distribute. How much you decide to distribute is purely a commercial decision.
From there, you will pay dividends to all shareholders whose shares have rights to dividends on a per-share basis.
If a share class has preferential rights to dividends, the shareholders in that class will be paid first, with any remaining dividends distributed to the remaining share classes.
Or if the share classes are pari-passu, dividends will be distributed equally to all shareholders in all classes.
Before you distribute dividends, you will need to hold a board meeting to agree on a dividend declaration and record the meeting in ‘board minutes.’
Once confirmed by the board, the dividends will be distributed to shareholders.A dividend voucher will need to be recorded by the company and issued to the shareholders – this can be sent by email, post, or via your accounting software.
The voucher should include the following details:
- the date
- company name
- name and address of the relevant shareholder
- the total number of shares owned
- the total dividend payable
- the director’s signature
The Vestd platform can help you work out how much dividends each shareholder should receive.
Just go to your cap table to see the number of shares in each class, and to work out how much each shareholder should be paid.
How do I add rights to dividends to share classes?
Whether you’re creating a new share class or amending the particulars of an existing class, you can easily add dividend rights to some or all of your share classes.
If your company is on model articles or the Vestd Articles of Association, you can create a new share class by authorising a directors’ and shareholders’ resolution.
If you’re creating a differential share class, the company will need to amend its Articles of Association as well as authorising a directors’ and shareholders’ resolution.
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