Assigning Shares – Who Should Receive Them And How Are They Allotted?

Shares are the way in which people own companies. Shares in public limited companies can be offered to everyone, but private limited companies (which are how most start-ups operate) are more restricted. Every private limited company must assign at least 1 share to at least one person.

In most start-ups, there is usually only one category of shares. Shareholders are typically entitled to vote on matters according to the company's Articles of Association, and to participate in receiving some of the company's profits by dividends.

As your company grows you may wish to consider issuing different classes of shares. For instance, shares issued to employees under incentive schemes could allow them to receive dividends but restrict voting rights so that the original business owners retain control.

What happens when shares are issued and what do shareholders do?

Share capital does not have to be paid back, unless the shares are a special type. So when shares are issued, the share capital is used (or saved) in the business, and the value of that share will depend on the fortune of that business. If the business fails, the shares could become worthless. On the other hand if the business flies, the shares will be a valuable asset for the shareholder.

Shareholders put pressure on boards to obtain strong performance, and to pay a decent dividend.

Who can or should receive shares?

In most cases the Directors of the company will also be listed as shareholders and will be assigned a number of shares in the company. However, there may be other stakeholders that you also wish to assign shares.

Issuing shares to friends or family can be a good way of securing their investment without having to make repayments as you would with a loan. However, such arrangements need to be formalised like any other business agreement, to take into account what may happen if the shareholders fall out.

Some companies offer shares to employees, as a reward for performance or loyalty. Employees are incentivised by the knowledge that they own some of the business that they are involved in.

Other shareholders may include venture capitalists who offer large sums of money in exchange for an equity stake in the business to fund general growth or new projects (e.g. purchase of large machinery to fulfil a significant contract). Venture capitalists may approach you in many ways. Professional equity houses approach firms they perceive as promising and hope to enjoy a share in the growth of the company's value as a result of their investment.

Some venture capitalists are business angels, otherwise known as "white knights", who offer equity funding to save a company that is in difficulty.

How much share capital should there be?

The initial shareholders decide the amount of share capital that will be issued and how it will be organised when the company is incorporated. This information has to be given to Companies House at the time of the company formation .

Often new businesses opt to start with 100 shares at £1.00 each as this can easily be divided with one share equalling one per cent of the business. However, in theory the number of shares can be as low as one with no maximum to the amount that can be issued.

Changes can be made to the share capital after this date. If the company's Articles of Association authorise them to do so, the directors of a company may allot further shares, or may have to seek authority from the existing shareholders to do this. Any changes must be notified to Companies House within a set period after the new shares are issued or shares bought back.