Issuing shares 101: What startup founders should know

Shares are fundamental to owning and running a company, so every founder has to get to grips with them sooner or later.

Maybe you’re part of the way through the incorporation form, staring at a box that asks how many shares to issue and at what value. Perhaps you’re bringing a co-founder on board and need to split ownership fairly, or perhaps an investor has asked how your equity is structured.

In any of these scenarios and many others, understanding how to issue shares helps you make better decisions, avoid costly mistakes, and stay in control as your business grows.

Read on for a guide on how many shares to issue, the main types, and the process for issuing new shares after formation.

What are shares in a limited company?

In the simplest possible terms, a share is a single unit of ownership in a limited company. If a company has issued 100 shares and you hold 60 of them, you generally own 60% of the business.

The law requires every company limited by shares to have at least one shareholder and at least one issued share.

Shares can usually be transferred or sold to someone else, subject to the company’s articles and any shareholders’ agreement. The company can also issue new shares later, which increases the total number of shares. A company can also create different classes (types) of shares, each carrying different rights.

What rights do shareholders have?

Limited company shares carry rights as well as representing ownership. Some of those rights are set by law, while others depend on your articles or a shareholders’ agreement, and they can vary between different classes of shares. Here are the main rights a shareholder can hold:

• Voting rights – the right to vote on shareholder decisions. Most decisions need only an ordinary resolution – a simple majority, meaning more than 50% of the votes – to pass. Specific major changes, such as altering the company’s articles or changing its name, need a special resolution of at least 75%.
• Dividend rights – the right to a share of the company’s profits when it has profits available to distribute and decides to pay a dividend, normally in proportion to how many shares the shareholder holds.
• Capital rights – the right to a share of any surplus assets if the company is wound up, once its creditors have been paid.
• Right to information – the right to receive the company’s annual accounts and reports, and notice of its general meetings.
• Pre-emption rights – the right of existing shareholders to be offered new shares first, in proportion to their current holding, before those shares can be issued to a new or selected shareholder.

Understanding share value

Each share also has a nominal value, sometimes called its par value. This is usually set at £1, but can be set lower (e.g. £0.01), when the company is formed.

Nominal value is the value attached to the share in the company’s records and determines the minimum amount that must be treated as share capital for that share. It’s essentially the minimum amount a person must pay, or agree to pay, to be issued a share.

Crucially, it’s not the same as market value. If the company later issues new shares to an investor at a higher price (reflecting the market value), the amount paid above the nominal value is called the share premium.

For example, suppose you form a company with 100 shares of £1 each. A couple of years later, the business is doing well, and an investor agrees to pay £50 for each new share they take. The £1 nominal value doesn’t change – but the extra £49 per share is share premium, which the company records separately from its share capital.

Be aware also of the difference between unpaid and partly paid shares. Any amount left unpaid on a share isn’t written off – it remains a debt owed by the shareholder to the company, which can be called in later, including if the company is wound up.

Where the money goes when shares are issued

When a company issues shares and the shareholder pays for them, that money legally belongs to the company, not to the shareholder personally.

Say you form a company and take 100 shares at £1 each. You owe the company £100, and once paid, that £100 is the company’s, with very strict limitations on how that money is to be used.

In return, the shareholder gets the shares themselves and the rights that come with them.

How many shares should you issue when you form a company?

A common question is, how many shares should a startup issue at the outset?

For many new companies, the typical starting point is 1,10, or 100 ordinary shares of £1 each. Many pick 100 shares because it’s easy to understand, since, for a company with one class of shares only, one share equals one per cent, and it keeps your share capital low.

In some cases, founders issue a higher number, such as 1,000 shares, though this is relatively rare.

If you issue a larger number of shares, you need to remember to consider the nominal value as well. For example, if you issue 10,000 shares of £1 each, you create £10,000 of share capital, and you’ll have a personal liability of £10,000 should the company be wound up. On the other hand, issuing 10,000 shares of £0.01 each creates a personal liability of just £10.

The shares you create at this point make up your issued share capital, and it’s worth knowing this is not a ceiling. You can issue new shares later as the business grows.

“Authorised share capital”

You may come across the term “authorised share capital” – usually in the articles of association of companies formed before October 2009, or certain companies (primarily those with multiple share classes).

This is essentially a cap on the total number of shares a company could issue, but it’s no longer a statutory requirement for companies formed under the Companies Act 2006. That said, your articles may still include their own limits or restrictions, so always check them before issuing more shares.

What types of shares can a startup issue?

Like any other company, a startup can issue several types of shares, each with its own set of rights. While you’ll probably only need to deal with ordinary shares at first, it helps to know your options as you progress and grow your business.

Ordinary shares

Ordinary shares are the most common type, and the default for almost every new company.

They carry standard voting rights, dividend rights, and capital rights, all in equal measure per share. Most companies that use the standard Model Articles incorporate with a single class of ordinary shares unless they choose a different structure at the outset.

Preference shares

Preference shares give their holder a preferential right, usually to dividends or to capital if the company is wound up, ahead of ordinary shareholders.

The trade-off is that they often carry limited or no voting rights. When founders weigh up preference shares vs ordinary shares, the difference comes down to this exchange of voting power for priority on returns.

Most startups have no need for preference shares at the outset, though, and they tend to appear later, when an investor asks for them as a condition of their investment.

Multiple share classes (alphabet shares)

Some companies create more than one class of share, often labelled A, B, and C, so that different shareholders hold different rights.

Sometimes known as alphabet shares, these can be useful for providing investors with a financial return without granting them voting control, for rewarding employees, for bringing family members in, or for protecting the founders’ say in key decisions.

You may also hear how alphabet shares are useful for paying different dividends to different shareholders. This is complex from a tax and accounting perspective, so it’s worth taking professional advice before proceeding.

Before issuing a new share class, check whether your articles already provide for that class and set out its rights. If they don’t, you may need to amend the articles first, so they state the class name, voting rights, dividend rights, capital rights, and any transfer or redemption rules.

How to issue shares after your company is formed

You can also create new shares after your company is incorporated, through a process known as share issue and allotment.

You might issue new shares when the company is giving someone a new ownership stake, such as an investor buying shares, an employee receiving equity, or a co-founder joining after incorporation. Whatever the reason, most allotments follow the following three stages:

1. Receiving the share application and payment

The process starts when the person who wants the shares applies to the company for them. This is usually a short, written application setting out how many shares they want and confirming they agree to become a member and be bound by the company’s articles.

Where the shares are being paid for, payment is normally made at this point. That payment covers the nominal value of the shares, plus any share premium if they’re being issued above nominal value. Alternatively, if the shares are not being paid for (either fully or partly), an undertaking (or “promise”) is made as part of the application to pay up when required. The directors then consider the application and decide whether to approve the allotment, which is the next stage.

2. Obtaining shareholder approval

The exact approvals, if any, that you require can differ from company to company. However, the key points are as follows:

• Your authority to issue shares – your articles of association govern how you run your company, and they decide whether the directors can issue new shares and on what terms. For a company with a single class of shares, the directors usually hold this power automatically under section 550 of the Companies Act 2006, as long as they are allotting more shares of that same class and the articles don’t remove or restrict the power. If the directors are not authorised to issue shares, the authorisation will need to be provided.
• Pre-emption rights – these give existing shareholders the right to be offered certain new shares first, in proportion to what they already hold, before the shares can be issued. They generally apply when you issue shares for cash and can arise under the Companies Act, your articles, or a shareholders’ agreement. If applicable, you’ll need to disapply these pre-emption rights, which is normally carried out by a special resolution.
• Whether you need shareholder approval – if you’re creating a new class of shares or there are any other special requirements in your company’s articles, the shareholders will usually need to approve the issue, or the relevant procedures followed, before it can go ahead.

3. Approving the allotment and updating your records

Passing the above checks and carrying out any of the relevant procedures doesn’t create the shares on its own. The directors must make a formal decision to issue them, and the company must then record who now owns what.

This is the stage where the company formally approves the allotment and records the new shareholding. You’ll typically need to follow these three steps:

• Pass a board resolution – this is a formal decision by the directors, recorded in writing, that approves the allotment. It should state how many shares you’re issuing, who they’re going to, and the price and terms.
• Update your register of members – the register of members is the company’s own record of who owns which shares, and it’s the main legal record of ownership. Enter the new shareholder and the shares they hold.
• Issue share certificates – a share certificate is evidence that someone owns the particular shares. It should indicate the shareholder’s name, the number and class of shares, and the amount paid up. Give one to each new shareholder within two months of the allotment.

4. Reporting the allotment to Companies House

At this point, the shares exist, and your own records show it, but the public register doesn’t yet reflect it. Reporting the allotment to Companies House logs the change on the public record.

• File form SH01 – you must submit form SH01, the Return of Allotment of Shares, within one month of the allotment. There’s no fee to file it. It includes a statement of capital, which summarises your total shares and their nominal value, plus any amounts unpaid for the shares by the shareholder, and the prescribed particulars, which set out the rights attached to each class of share.
• Update PSC details – if the allotment changes who owns or controls the company, you may need to update the company’s PSC details at Companies House.
• Update your confirmation statement – your next confirmation statement, the annual snapshot of company information you file with Companies House, should then show the updated shareholdings when it falls due.

Do I need a shareholders’ agreement?

A shareholders’ agreement is a private contract between the people who own shares in a company. It works alongside your articles of association and sets out how the shareholders agree to deal with one another.

It’s important to have one in place when you have other shareholders involved. Whilst there’s no set criteria of what an agreement will include, it typically sets the rules for decision-making, exits, share transfers, leaver provisions, disputes, and what happens if the company is sold.

How a shareholders’ agreement differs from your articles of association

Your articles of association and your shareholders’ agreement do different jobs. Your articles are the core part of your company’s constitution.

They’re formal legal documents, filed at Companies House, that set out the rules the company itself runs by, and they bind every shareholder whether they’ve read them or not.

On the other hand, a shareholders’ agreement is a contract between the shareholders who sign it. It governs the relationship between those individuals, and it binds only the people who are party to it. They are not filed at Companies House and are therefore not publicly available.

In practice, there can be a lot of crossovers between the articles of association and the shareholders’ agreement.

What a shareholders’ agreement covers

There are no set rules on what a shareholders’ agreement must include, but a straightforward shareholders’ agreement for startups often covers things such as:

• What happens when a shareholder leaves? The agreement can require a departing shareholder to sell their shares back and set the price they receive. This is also where you might choose to detail vesting rules. Rather than a co-founder owning their full stake from day one, a vesting schedule specifies that they’ll earn it gradually over a set period or against certain milestones, so someone who leaves early keeps only the portion they’ve earned.
• What happens if the company is sold – it can set out how a sale is handled and protect each shareholder in the process. For example, it can ensure that a majority can bring the other shareholders into a sale they’ve agreed on, and smaller shareholders can insist on being bought out on the same terms as everyone else.
• How disagreements are settled – it can lay out how the shareholders resolve disputes and break a deadlock, which matters most when two founders hold equal shares and can’t agree on a decision between them.

Why a shareholders’ agreement matters

A shareholders’ agreement matters because it lets shareholders decide in advance things such as what happens when someone leaves the business, when it’s sold, or when they can’t agree – instead of leaving those questions unresolved until the moment they actually happen (at which point, it may be too late to come to a mutually agreed decision).

Suppose you and a co-founder each take 50 shares (meaning there are 100 shares in total and they’re split 50/50) and start building the business together. Six months in, your co-founder decides it isn’t for them and walks away.

Without an agreement, they keep all 50 shares and half the company, for six months of work, and there is little you can do about it. Or suppose the two of you fall out and can’t agree on a decision, then neither holds enough votes to carry it, and the company can end up deadlocked, unable to move forward.

With an agreement in place covering these kinds of scenarios, the co-founder could be forced to sell all of the shares back to you at a pre-agreed price, so you regain 100% control of the company. Alternatively, if a vesting schedule had been put in place, the shareholder might not have received all of those 50 shares in the first place, so the loss of your control might not be so dramatic.

The same agreement can also break a deadlock – for instance, by bringing in an independent third party to decide, or giving one founder a mechanism to buy the other out – so a disagreement doesn’t freeze the business.

Common share issuance mistakes to avoid

A few predictable errors cause most of the trouble founders run into later. All of them are easy to avoid with a little planning.

• Skipping the required approvals – issuing shares without the authority to allot, without disapplying pre-emption rights, or without the shareholder approval the situation calls for can leave an allotment open to challenge.
• No vesting on co-founder shares – handing a co-founder their full stake on day one means that if they leave after a few months, they could walk away with a large slice of the company. A vesting schedule ties equity to time or milestones.
• Missing the SH01 deadline – forgetting to file the SH01 within one month creates a compliance problem and can complicate a future funding round or sale.
• A 50/50 split with no agreement – splitting equity equally with a co-founder and no shareholders’ agreement leaves you exposed if the relationship breaks down or one of you leaves.
• Confusing nominal value with market value – the nominal value (normally £1) on the share certificate is not what the share is worth. Be clear on the difference between nominal and market value.
• Ignoring pre-emption rights – even if the directors can allot shares, existing shareholders may still have the right to be offered those shares first. Check before you issue new shares.
• Forgetting the tax angle – issuing shares to employees, directors, or connected people can have tax consequences, especially if the shares are issued below market value or come with conditions attached.
• Not updating PSC details – if the allotment changes who owns or controls the company, you may need to update the company’s PSC details at Companies House, especially where someone now holds more than 25% of the shares or voting rights.
• Leaving a messy paper trail – investors will expect to see board minutes, registers, SH01 filings, share certificates, and any shareholder approvals or waivers. Missing paperwork is much easier to fix at the time rather than later, or when due diligence is being carried out on your company.

The founders who avoid problems later are the ones who treat their share structure as a decision, not a default. Spend an afternoon getting it right before you issue shares to anyone else. It is far easier and cheaper than unwinding a messy cap table two years later.

Nicholas Campion, Director of Company Secretarial at Rapid Formations

Get your share structure right from the start

Shares are fundamental to owning and managing a company, so mastering them is a huge asset to any founder.

Equipped with a strong understanding of shares and how they work, you can set up your share structure right from day one, bring in a co-founder, reward the people helping you build the business, or raise investment without losing sight of who owns what.

You don’t need a complicated structure to do that. A sensible number of shares, clean records, and a shareholders’ agreement will often carry your company a long way.

If you haven’t formed your company yet, Rapid Formations registers it at Companies House, with your shareholders and share structure set up correctly from day one.

And if you’re already trading and need to issue more shares, our share issue service handles the allotment, issues the share certificates, and files the SH01 return with Companies House for you.