The nominal value (NV) is essentially the minimum value of a share if the company in question was worthless.
It’s easier to think of the nominal value when a company is first incorporated. Typically, a company is incorporated with 100 shares with an aggregate nominal value of £100 – so the nominal value per share is £1.
The founder of the company will pay the aggregate nominal value into the company once incorporated as a way to start the business and establish ownership.
The aggregate nominal value also reflects the founder’s legal liability if the company ever faces a winding-up order or becomes insolvent – an essential reason to keep aggregate nominal values low when incorporating a business.
Is nominal value different from market value?
Once our example company is up and running, the value of its shares increases whilst the nominal value remains the same. As the company continues to grow, so does its market value.
The market value represents the value of the company, the nominal value simply acts as a starting point for new shares.
Can a nominal value change?
Yes, if the company subdivides its share capital.
A subdivision multiples a company’s shares and divides its nominal value by the same amount. Companies will often complete a subdivision after incorporation to make their share capital more flexible and easier to distribute for future share issues, like investment rounds or share schemes.
For example, subdividing 100 shares by a ratio of 1,000 would mean the company now has 100,000 with a nominal value of £0.001 per share.
The company’s shares have become more liquid, but its share capital remains the same: the aggregate nominal value is still £100 (assuming no additional shares have been sold).
It’s worth adding that different share classes can have different nominal values depending on their setup. But if you were to complete a subdivision through Vestd, we’d subdivide all share classes for simplicity.
Similarly, when shares are created – rather than subdivided – the company’s aggregate nominal value will change based on the number of new shares.
Using our example of 100 shares with a nominal value of £1 per share, if 100 more shares were created for the funding round, the company’s aggregate nominal value would be £200.
However, as we established above, the nominal value and market value are different, so the 100 shares could be sold for more than their nominal value. This is called the share premium.
The share premium is the difference between the nominal value and the market value of the shares.
Growth shares and nominal values
One of the best things about growth shares is that recipients only have to pay nominal value for the shares. These growth shares can be in an established company with real market value, but rather than buying in at the market rate, you pay the nominal value. Which, if set up correctly, is less than pennies.
Of course, growth shares are issued out of the money (meaning they’re essentially worthless on issue) and only become valuable once the market value of the shares exceeds the recipient’s hurdle rate.
But it’s much easier for an established company to add value than it is a startup, reducing the risk of the (nominal) investment.
Growth shares – as the name suggests – are more of a tool to incentivise recipients to increase the value of the company, and in turn their shares.
The nominal value simply acts as the entry point.
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