Issuance of shares is paramount to any company that wants to operate as a limited liability company, irrespective of whether it’s a Public or Private traded company. The company issues shares in order to raise capital. The shares on offer are usually bought by shareholders. This implies that the shareholder owns a segment of the company. As the number of shares increases, the segment represented by 1 share reduces drastically. The number of shares determines individual shareholders liability in a company in case of solvency.
There Are Different Types Of Shares With Their Respective Obligations And Rights.
Dividends refer to annual distribution of company profits to shareholders depending on the decision made by the Board of Directors. Dividends are paid proportionally to the number of shares a shareholder owns.
The number of shares owned by an individual also determines their voting power and subsequently their influence in the company. Shareholders are usually paid after clearing company debtors in case of insolvency. This implies that company shares are just a residual stake that a shareholder risks to forego. Determination of the type of shares to be issued, the amount of capital to raise and number of shares to issue is a poignant part of company formation.
The Structure of Shares
This refers to the classification of shares according to their rights and obligations, which include;
Ordinary Shares
This is the basic class of issuance of shares issued by many companies. Ordinary Shareholders are entitled to vote in a company in proportion to the number of shares they hold in a company. They are also entitled to dividends paid from the profits after preference shareholders have been paid out.
In case company insolvency, ordinary shareholders will refunded last or receive any profits or losses after the preference shares and company debts have been paid out. However some companies may decide to split ordinary shares into different sub-groups with different rights and obligations. If for instance company owners would like to retain their voting power, they can issue ordinary shares without voting powers, especially to the employees.
Preference Shares
This class of shares does not have any voting rights which are mostly issued when existing shareholders would like to retain their voting rights. Preference shares can also be used as employee incentive schemes, which raise additional funds without relinquishing voting rights.
One of the advantages of preference shares is that they have a fixed percentage of dividends irrespective of the profitability. They are given the first priority when issuing dividends or paid up first during the company’s insolvency. Preference shares can either be categorized as redeemable or irredeemable.
Redeemable Shares
This refers to shares issued but the company has a right to purchase them back at future date as per the agreement or when directors decide to do so. These are more appropriate for employees. to give allowance for redemption when the employee leaves the company.
Raising Finance
The Memorandum of Association usually states the initial number of shares issued and their respective value at the formation of the company. The Memorandum of Association is usually signed by all founders of the company. However this document is subject to alterations if the company requires additional capital in future.
There Are Many Platforms To Raise Finances Through Shares, Namely;
- Rights issue to Existing Share holders
This implies that shares are issued to existing shareholders proportionately to their current shareholding. Normally the shares are issued at a discount to existing shareholders in tandem with the number of shares owned. Discounted rates on shares issue acts as a motivation for existing shareholder to purchase additional shares.
- New Share Issue
This is simply the issuance of shares to external investors, in order to inject more capital and management style into the company. This implies that the percentage ownership of existing shareholders reduces drastically. However existing shareholders may benefit from the new share prices at the stock market due to more demand of the shares,
Potential Investors can emanate from the following categories:
- Angel Investors
This refers to affluent individuals who prefer to invest in the early stages of start-ups.
- Venture Capitalists
These are companies that invest enormous amounts in existing businesses, especially at a later stage of start-ups. The come at a later stage than the Angel investors.