Founded gives you several options for creating classes of shares in your business. This way you can customize the shares given to each shareholder to make sure they reflect the rights and privileges you want each person to have.
Who are Shareholders and What Do They Do?
A company is owned by its shareholders. The number of shares owned by each shareholder reflects the proportion of the company they own. So if a company issues 1000 shares, each share equals 0.1% of the company's ownership.
But that doesn't mean that the number of shares owned is the only thing that differentiates the shareholders. Creating multiple share classes allows different groups of shareholders to have different rights and privileges over the company.
What are Voting and Non-Voting Shares?
The most common difference among share classes is the ability to vote on matters relating to the business. Voting shares will be held by those shareholders who want to actively participate in the decision-making process (like the founders, directors, senior managers, etc.). Non-voting shares are intended for shareholders who wish to benefit from the company's long-term growth, but don't necessary want to get involved in high-level decision (for example, employees).
In most instances, one voting share is equivalent to one vote at a shareholders meeting. So the holder of a majority of voting shares will have the decisive vote on any matter put to the shareholders for a vote. There are certain matters where even the non-voting shareholders will get a vote, but these instances are rare and relate to fundamental changes to the business.
What are Common and Preferred Shares?
This is where the differences between share classes can be incredibly important, and not as obvious as the difference between Voting and Non-Voting shares. Founded also lets you choose between Common and Preferred shares.
Common shares are usually sufficient for most businesses, especially when they're just getting started. Preferred shares have special rights and conditions attached to them, which are explained below. Despite being called "Preferred" shares, the word preferred does not mean they are necessarily more valuable than Common shares. We highly recommend you get advice from a lawyer and an accountant before using Preferred shares on Founded.
Common Shares: The simple standard for small businesses
Common Shares are the standard shares of a company. As the company grows and becomes profitable, the value of the Common Shares will increase over time.
Common Shares do not have any special priority over the company's assets. So when it stops operating, the holders of Common Shares will be paid out in a manner that reflects how many shares they own.
The company's directors can declare and pay dividends on Common Shares at any time and in any amount. Dividends are entirely at their discretion.
Preferred Shares: Complex shares to be used for tax planning
Preferred Shares are called 'preferred' because they entitle the shareholder to get paid back first if the company stops operating. However, it is important to understand that Preferred Shares are not necessarily more valuable than Common Shares. The Preferred Shares have a limit on the amount they can increase in value over time. They are often issued for tax-planning reasons in specific circumstances with the advice of an accountant.
Priority (Liquidation, Dissolution, or Winding-Up)
If the company stops operating and liquidates its assets, Preferred Shareholders are entitled to be paid back before the holders of Common Shares. Among the holders of Preferred Shares, priority for payment will be given in alphabetical order based on the class of Preferred Shares held. However, the amount Preferred shareholders will receive is capped at the amount originally paid for those shares. For example, if only a nominal amount was paid for the Preferred Shares at the time of incorporation, then that nominal amount is all the shareholder will receive, even if the Corporation is worth much more.
Preferred Shares are redeemable by the directors at any time. This means the directors can buy the Preferred Shares from the shareholder, whether or not the shareholder wants to sell the shares. The price for the Preferred Shares will be equal to what the shareholder originally paid to receive the shares, even if they are worth much more.
Preferred Shares can be retracted by the shareholder at any time. This allows the holder of Preferred Shares to require the Corporation to buy back the shares, whether or not the Corporation wishes to buy the Preferred Shares, at a price equal to what the shareholder originally paid to receive the shares. This ensures the hold of Preferred Shares will not lose the initial amount paid for the shares.
Conclusion: Use Preferred Shares with Caution
While Founded lets you have a huge range of flexibility over your company's ownership, it's important to fully understand the consequences of using Preferred Shares. Always consult an expert, like a lawyer or an accountant, when you don't fully understand these implications.