Knowledge Base: Share Classes / Alphabet Shares

Ordinary shares are the only default share class in existence. If you wish to create a new share class in your paperwork, see our Knowledge Base Article on Creating a new share class.

In most cases different share classes is overcomplicating your structure - see our Article

Investors won't want founders to carry more rights than them, they almost certainly won't let you pay dividends to specific 'alphabet' shares and they'll be nervous that these differing rights will accidentally create a 'preference' and put (S)EIS eligibility at risk.

You are likely to see different shares when you get to VCs. Unless it’s an SEIS fund a VC is likely to request anti-dilution, liquidation preferences (investor preferential payouts in the event the company is sold or experiences some other so-called “liquidity event") and other investor benefits.

Types of rights associated with shares

• Voting: Holders of these shares have the right to vote on business decisions, such as electing directors or making other key decisions at shareholder meetings. Note, it is not a ‘preference’ for Founders to have voting shares and everyone else not to. However, your investors will push back on it ie: why would an investor want non-voting?

• Dividend: The right to receive a share of the company's profits in the form of dividends. Note, a dividend right in a share class doesn't mean they are going to get a dividend unless the company declares one. Dividend rights are considered a preference for SEIS.

• Capital distribution: Shareholders have rights to the company's assets if the company is liquidated, after creditors and other obligations are paid. Preferred shareholders often have priority over common shareholders in such distributions - this would be a preference for SEIS

• Pre-emption: The right to maintain a proportional ownership in the company by purchasing additional shares before they are offered to new investors. Helps prevent dilution of ownership.

Remember, when you give one investor a right, then all investors will naturally ask for it. Potential investors can clearly see on the cap table in the Shareholders Agreement. For example, they have Ordinary shares while someone else has Ordinary A shares with a liquidation preference.

As mentioned above, it’s important to note under (S)EIS you are not allowed to give SEIS investors a preference over other shares and if you do you can break everybody, including your prior investor’s SEIS. The reason is that in order to qualify for SEIS or EIS, the investor has to incur the “normal risks of an investor” – i.e. they can’t get a better deal than any other shareholder.

The exception to this rule is: Liquidation Priority on Exit. See our Knowledge Base Article on Liquidation Priority on Exit.

SEIS/EIS Compliance Tips

1. Avoid preferential rights - SEIS/EIS shares cannot include preferential rights for dividends or capital payouts. Investors must bear the “normal risks” of investment to qualify for tax relief.

2. Liquidation Preference - If granted to one investor, others will likely request the same.

3. Monitor Voting Thresholds - Investors cannot hold more than 30% of voting shares without breaching SEIS/EIS rules. Normally this isn’t nearly a problem but if some founder shares were non-voting (or a type of investor), then certain investors could get above the 30% voting test. Another reason to stick with ordinary shares for all.

Is your Investor UK or Overseas?

A UK investor is likely to want to make use of SEIS/EIS. In which case, make it clear ‘In the UK, it is standard for all stakeholders (founders / investors) to be allocated Ordinary shares’. Under the SEIS/EIS rules, investors aren’t allowed a preference over other shares classes – see for example

If they are not a UK investor try to allocate them ordinary shares, if they expect preference shares make sure they are specific about what preference they are seeking so we can reflect in the paperwork. A 1x non-participating liquidation preference is fairly standard in these situations for non-SEIS/EIS investors and isn’t unfair to other investors who make use of downside protection via SEIS/EIS.

FAQs

1. Ordinary shares include a dividend, does this mean my investors are entitled to dividends throughout? What if I want to retain and reinvest profits? - An investor has rights to dividends, this doesn't mean directors need to declare dividends. If you do, those shares get pro-rata allocation. Notes: Trying to give investors non-dividend shares is a bad look.

2. S/EIS and different share classes - There is no problem having different voting rights across share classes. There can be problems if you have different capital and dividend rights and problems if you mix and match nominal values.

3. Converting Ordinary As to Ordinary shares - See this guide on Redesignation of shares