Issuing shares is a powerful way to generate capital that can help startups with the…
Company Structure: Founders Shares vs Ordinary Shares
Structuring ownership of your new business or startup is a complicated process. Understanding the difference between Founder shares and ordinary shares will help you navigate the challenges presented by managing control over your business.
Building your startup share structure will determine how you will allocate shares to your shareholders. Getting this right is critical to managing the ownership of your business or startup. Depending on the type of business you operate and the manner in which you want to distribute ownership, the types of shares you decide to issue can vary.
The Importance of Share Class Codes
When you build your startup share structure, you will need to select from different share categories, or share class codes. Different share categories are associated with different rights and limitations.
You may, for example, want to provide some shareholders with the ability to vote on company decisions while providing other shareholders with rights to dividends only, and no voting capacity. Share class codes are simple acronyms used to designate the different types of share classes that make this possible.
The two most common types of shares are ordinary shares, or common stock, and preference shares, or preference stock. If you’re interested in the difference between preference shares and common shares, take a look over the Fullstack Ordinary Shares and Preference Shares: What’s the Difference? Guide.
Founders shares, however, are another important share class that provide unique rights. What’s the difference between Founder shares and ordinary shares, though?
What are Founder Shares?
So, in your startup share structure, what are Founder shares?
Founder shares are a distinct share class that are issued to the founders of a company, represented by the FOU share class code. In the United states, founder shares are typically represented as Class F stock.
Founder shares provide founders with unique rights governing the control and distribution of profits or specific voting rights that are unavailable to other share classes. Founder shares are highly flexible, so the rights attached to them can vary greatly.
- Special features and rights can be attached to founder shares, such as:
- Founder shareholders may receive returns only after dividends have been paid out to common stockholders
- Founder shares make it possible for the vesting period to begin immediately, as opposed to the “one-year cliff” that ordinary shareholders are obligated to follow. For more information on the vesting process and how it relates to founder shares, see the Fullstack guide to Founder Shares & How They Can Help You
- Founder shares can integrate acceleration clauses, or augmented vesting in the case of termination
- Founder shares possess negligible par value
- Founder shares can also provide the right of first refusal in the event of co-founder share sales
What are Ordinary Shares?
- Your startup share structure will include ordinary share. Ordinary Shares, or ORD, are the most frequently traded share class in Australia. When investors or traders discuss “shares” they are, in most cases, talking about ordinary shares. Ordinary shares provide shareholders with the right to:
- Receive notice of and attend meetings of company members
- Vote on company matters
- Receive dividends
- Asset distribution rights should a company wind up with surplus assets
It’s important to note that not all ordinary shares provide ordinary shareholders with the right to dividends. Whether or not ordinary shares provide ordinary shareholders with a dividend, or the rights to a percentage of the profits generated by a company, is determined by the company itself.
When building your startup share structure remember that Founder shares can function as a powerful method of managing ownership and control over a company. Ordinary shares, however, don’t provide any additional or special rights.
While Founder shares can be an effective tool for addressing the ownership issues that arise when establishing a startup, it’s important to consider the implications that unbalanced control provisions or onerous vesting arrangements can have on investor agreements or founder incentives.
Structuring the ownership and share distribution of your startup can be confusing. If you’re not sure whether you need to issue founder shares, reach out to Fullstack for comprehensive guidance today.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.