Share Classes - An introductionFeb 01, 2023
When raising investment, there are several types of shares a company can issue including ordinary, preference, non-voting, and redeemable. When it comes to equity crowdfunding, the main share type you need to think about is ordinary shares.
...can be categorised into various classes, usually Class A, Class B, Class C etc.. The differences between these classes are around voting rights, entitlement to dividends, and what happens in the event of a business winding up or exiting. There’s also a ‘thing’ called Pre-emption rights. Pre-emption gives a shareholder the right to maintain their level of shareholding when the company takes on future additional investment to avoid their % equity being diluted i.e. reduced.
For example: Let’s say someone owns 10% of your business, and you want to raise further investment. In order to make room for new investors, existing shareholder’s holdings can be diluted i.e. reduced. So in this example, your new round of funding could dilute this 10% shareholder to owning say 9% of the business. If they have pre-emption rights, which typically come with class A shares, they will then have the right of first refusal at the next round of funding, giving them the option to buy a further 1% of the business at the new increased company valuation to maintain their 10% shareholding.
Of course there’s nothing compelling them to inject more money into the business to maintain their previous level of shareholding; it’s their decision as to whether or not they take up their pre-emption rights, or alternatively simply allow their shareholding to dilute.
Class A shares
...usually offer full and standard rights such as voting, dividend entitlement, and pre-emption. When inviting people to invest varying amounts of money, such as with crowdfunding, it’s not uncommon to see a business offering Class A shares over a set level of investment, for example £20,000, and everything less than that Class B.
The typical distinction is that Class B shares won’t usually provide voting or pre-emption rights.
A word of caution
A business owner might be easily tempted into offering only Class B, and even lower class, shares. However we advise caution. Mainly because not providing full voting rights for example usually has very little practical benefit to the business but can be seen by prospective investors as mean. Don’t forget that investors in a business, often via crowdfunding, may own only a very small percentage of the business and can’t therefore wield any real level of influence.
Here’s a fun fact.
You can, within reason, call your different share classes anything you like. For example let’s say your business is something to do with boats, sailing etc.. So you might call your Class A shares “Captain’s Shares” and Class B ‘First Mate Shares’. And if in the rare examples where Class C is offered, these might be LandLubber Shares. In reality, not too many companies do this, but it’s possible. A benefit might be for marketing or investor community engagement or if you want to use less formal language!
If you think you might be ready to raise business investment via equity crowdfunding, do try out this quick and easy Readiness Quiz. If the results show that the time is right, you’ll be given the opportunity to book a free Discovery call with us. During this call, we’ll discuss your investment ambitions and how we might be able to help you achieve those ambitions. Who knows, one day you might join our 100% success club!
Author: Richard Mojel - Commercial Director ISQ Crowdfunding