Why Have Different Share Classes?
Not all shares are created equal. Start-ups can issue different types (or classes) of shares with different rights attached to them. Having different classes of shares can be used for a number of different reasons but more often that not, they are used to manage the amount of control shareholders have in relation to their ownership of the company.
For example, your company will want to have different share classess depending on whether it has:
- A sole founder;
- Co-founders;
- Co-founders & family (acting as silent investors);
- Co-founders & employee stock options or vesting rights;
- Co-founders & accredited investors (Angles)
Wires Law also builds custom solutions for clients with particular needs. The various kinds of preferences, rights, and conditions that may be attached to shares are virtually limitless and can effect the value of the shares (i.e. what an investor is willing to pay for them).
For a sole founder, companies are often incorporated with only one class of shares, which are usually designated as “common” or “Class A” shares. The decision to issue other classes of shares hinges on your company’s circumstances, particularly whether you intend on raising outside financing from other investors or whether you intend on hiring an employee and offering part or all of his or her compensation in the form of shares.
Incorporation documents setting out share classes can always be amended and the addition of another class of shares can be deferred until they are necessary.
Of the various rights, privileges, restrictions and conditions a founder can attach to his or her shares, the following conditions should be considered if more than one class of shares is being created:
- cumulative, non-cumulative, or partially cumulative dividends, and specific dividend rates;
- preference as to payment of dividends;
- preference as to repayment of capital upon dissolution;
- participation in the distribution of the corporation’s assets upon dissolution other than with respect to return of capital;
- right to elect all or part of the board of directors;
- right to convert into shares of another class;
- redemption of shares at the option of the corporation or retraction of shares at the option of the shareholder;
- purchase of shares by the corporation for cancellation; and
- conditions, restrictions, limitations, or prohibitions on the right to vote at shareholders’ meetings.
John Wires