Shares for outside investors

You should always take advice before you give class shares in your company to outside investors such as venture capitalists or business angels - to make sure you achieve your objectives, to make sure you don't inadvertently lose control of (or deadlock) your company, and to make sure the tax position for both company and shareholders is as favourable as it can be.

Once you have issued shares to outside investors you can't change the rights that attach to them without their consent. So you can't change your mind if you subsequently realise you have given class shareholders too many, or the wrong, share rights. That's why advice is crucial.

Shares for outside investors

Outside investors will always want significant share rights that mean they benefit substantially when times are good, and their interests are protected if times are bad. Particularly, they will always want an 'exit route' that enables them to cash in their investment. If the company has done well, this may be by way of a public offering of the company's shares. If it has not done so well, they will want rights to redeem their shares - to 'cash them in' and get their money back.

Articles of Association -v- shareholders' agreement

Shareholder rights can be set out either in a company's articles, or in a shareholders' agreement, or in a combination of the two. Technically, they can also be set out in a shareholders' resolution too, but this is rare. There are pros and cons to each - you will need advice on which is best for you. Very broadly, a shareholders' agreement is appropriate if the arrangements you want to set up are for individuals involved with the company (or some of them) now. Articles are appropriate if you want the arrangements to apply to future shareholders too.

Naming the shares

Finally, please note that a class of shares can be given any name you wish. For example, there is no set of fixed rights that must apply if you call your shares 'preference' shares - the rights attached to preference shares may be quite different in two different companies. Usually, though, it is sensible for the name to reflect the rights attached to the shares.

For example, the share rights for a class of non-voting, redeemable shares may also say that, if a preferential dividend is not paid in one period it is to be carried forward and paid in a subsequent period. In those circumstances, the dividend is said to be 'cumulative'. If the share rights say that the preferential shares are also entitled to an ordinary dividend, as well as the preferential dividend, they are said to be 'participating'. Good practice would be to call such shares Cumulative, Participating, Redeemable, Non-Voting Preference shares.

Always take legal advice on the rights appropriate to your particular circumstances when considering shares for outside investors.