when you get started in business you
probably think all you need to worry
about is the product or service
that you've got to deliver just get that
right find the customers
and jobs done however there's obviously
a lot of legal and finance things that
you need to worry about too
when you start up a comp start up a
limited company and the one we're going
to talk about today
is how many shares your startup should
have
now the obvious answer which when you
talk to any professional about that will
be
it depends which isn't really
particularly helpful
so in this video we're going to talk
about what are the factors involved
uh when it comes to making that decision
of how many shares you have in your
startup
uh the types of shares that you're gonna
need to think about potentially
and also why flexibility is is the key
thing that you need to think about
uh long term in terms of when you
you make the short term decision of how
many shares your startup's going to have
before we get into detail uh please
don't forget to subscribe where we've
got lots more videos
on the basics of business with hints and
tips and how you get your startup
formed and established but what we're
going to do in this video is going to
take you through
a few things about what our shares and
then we're going to get into some
practical examples
to help so neil probably first thing we
do when we're coming to that question is
what what are shares that's probably the
first thing that we need to
tell everyone what what they are before
we get into how many you should have
yeah and i think the simplest way to
describe that shares are like the
currency or the
the um the piece of paper that a company
issues
in return for investment in return for
cash
so if you're going to invest in a
company you give the company money
and it gives you a number of shares in
return and that
indicates how much of the company you
own control and have influence over the
key point it doesn't have to be money
it doesn't have to be money no you can
you could work for
you know sweat equity is the term that
people use where you get
shares in return for providing some form
of service
or something else for the company it
doesn't have to be cash okay
so i mean there are a number of factors
involved and as i say i mean
it does depend i mean we're sort of
being a bit tongue-in-cheek it does
depend however
we're trying to give you some practical
examples here of the factors that are
that are relevant and there's there are
six we're going to take you through
there as we see just there there's
keeping the mass easy is one of the
things we want to do
future proofing in terms of thinking of
investment there's that
thing we talked about there of money
versus sweat equity where you're paying
in time rather than money for your
shares
there's there's an image question in
terms of perception of the company
there's a thing called share premiums
which
you talk about a bit more and types of
shares is obviously is
there are various types of shares and
that's a key thing
uh that we need to consider so taking
the first one
if we're looking at keeping the mass
easy why
is that an important thing when it comes
to how many shares you need in your
startup
well it's just you know it's a good um
mantra for everything really keep it as
simple as possible why over complicate
things
um people you know very often people
will do that and there's no need to
so at its simplest um you know as as the
slide there shows if there's three of
you
uh starting a business together and
you're going to own it a third each
then you just need one chair each um and
three shares would
would be enough to at least deal with
the
percentage of ownership and control that
that
the three people forming the company or
starting a business together
would have and and that you know that
that is
at its simplest the the easy way to do
it and you could just do that
there will be which we'll come on to
there's lots of other
considerations that could be taken into
account um
to decide how many shares um you know
but it still needs to be a third each if
you're going to have three people owning
a third
so one each is is as simple as it can
get so
you you've advised a lot of businesses
and i mean is there any times you've
seen people not
trying to make it nice easy in terms of
they've just got themselves in a
and a mess in terms of rather than just
sticking to that basic of
if there's three of us three shares if
there's four of us
four shares and whatever proportion
we're talking about like
we've talked looked out there in the
slide of sixty percent
get the mass easy six shares if there's
another two
two shares each twenty percent etcetera
are there any reasons why you wouldn't
keep the mass easy there can be all
sorts of
for keeping the maths easy no i think
that that's
um that's a key requirement and later on
in the life of the company
that can come back and and haunt people
if they haven't
um thought about the maths and and the
second point that we had was the sort of
future-proofing
so you know but that is still linked to
keeping the maths easy so for example
if you've issued a company and it's you
and i
we've got 50 shares each is 100 shares
and then
in a couple of years time we want to
take some investment
then there's only 100 shares an issue
the multiple the number of decimal
points effectively as to how
many um shares if someone's going to put
money in
for three percent of the company or five
percent of the company or ten percent of
the company
the hundred shares the subdivision of
that is
into different percentages is not as as
easy whereas
for the same amount of money going in we
could have
500 shares each or 5 000 shares each or
50 000 shares each
the the amount of money that goes in
doesn't have to change but the number of
shares you get
can be wildly different and if we had 10
000 shares an issue
then we can give away or we can seek
investment for much smaller percentages
because it's still a round number of
shares
and very often those are the sorts of
things when we talk about future
proofing
is investment or if you were trying to
do anything with um
future employees you're thinking of
share options schemes and things like
that
so again the larger the number of shares
the
easier it is to give people an option or
take an investment over um a certain
percentage
because it's yeah whereas the smaller
the number of shares
it's almost like the bigger the
percentage needs to be for the options
and the investment
and it's it so we're only we can keep
the mass simple when we start i mean if
it's you and me
and we've got 100 shares we can just
have 50 50 but in terms of by having
that hundred
if we take on some investment as we're
looking at the slide there
you can then just give up proportions of
those 50 to the investors as they
as they come along that's correct yeah
yeah yeah so
so it's so that would be wherever say
the the
keeping it simple and the future
proofing is having
um the different number of shares and i
think where we
we talked about share premiums later on
but that's where
you know you can issue chairs don't have
to be
for the same amount of money so a share
when it's exists
is the terminologies they call it it's
an ordinary share of the company
and it has a nominal value of one pound
each and that's sort of what starts so
so if we were starting up in business in
theory
i've got to put 50 pounds in to get 51
pound shares you put 50 pounds in
so that's where at its simplest how it
works um but what we could do
is we could have 10 000 uh penny shares
and i'd still put 50 pounds in but i'd
get 5 000 shares
instead of only 50. so that way it can
work through and that's where we have to
share premiums and things
but so the amount of money doesn't have
to change but the number of shares
can um and that again is you know we
sort of jumping ahead in terms of the
perception of things as well
does it look uh as if you're a bigger
more
successful company because you've got 10
000 shares an issue
instead of one or 100 or whatever
and so there is an element that some
people feel that sort of shows
that they have future-proofed it and
there are plans for the company it's not
just
me and you just going to be running this
company on our own forever and it's a
lifestyle business by having a number of
shares
that are there that that can mean
people's perception of the company is
different
okay so we're going to come on to that a
bit later on but in terms of
factor two just as we've got there
future proofing we can keep the mass
simple
both at the beginning and as we progress
and just the example we've given there
giving 100 shares it's an easy thing to
divide
if you're the main shoulder starting off
on your own you can give yourself all
100 to start with
and then when your five investors come
on the 100 makes the mass easy in terms
of
give them five each and they've got the
five percent yeah
yeah moving on to the moving on to the
third factor which we want to talk about
is just as neil touched on a bit there
and we've talked
talked about a bit previously is it
doesn't have to be money i know
it's an obvious thing to think about in
terms of
shares come mean you've got to pay for
them but
you can use your work to pay for them as
well yeah and there's
there's some there's some funny little
tax issues that can come around that as
well so
if for example you say to someone like
i'm gonna come and work in your
company and i'm gonna charge you 10 000
pounds for doing something
and you said well instead of paying you
10 000 pounds i'll give you a percentage
of the company
or give you some shares technically you
are actually
performing the service and being paid to
do that service
so you should be declaring that 10 000
pounds as if you've
received it and you'll pay tax on it
even though all you've had is
some share certificates instead of cash
to pay the tax
so sweat equity generally isn't referred
to in those
cases because um that is actually just
a normal trading transaction but instead
of receiving cash
you've received shares sweat equity
usually would be referred to where
i will take a stake in a company and
work to help
grow or do whatever it is with that
company and be involved with the company
for the services but it's not a sort of
finite here's a service i'm going to do
here's a period of time i'm going to
work
i would normally charge x and in return
i'll take
shares sweat equity is more a the skills
you have
the the the things you can bring to the
company will be useful
over the you know whilst we started up
and beyond and
for that you get a stake in the company
without
actually having to put any money but
it's also something for founders to be a
bit wary of in terms of just
and invest if you've started something
you're doing well and then
someone comes along and says oh i'll
give you a bit of help and give me 20
so you've got to be careful who you it
sounds cheap but because you're not
actually you know you're getting an
experienced marketeer or accountant or
whatever it is to come and help you with
your business as you start up
and you can't afford to pay them what
they would normally want for their
hourly or day rate so it can it can you
can kid yourself that it's
it's not expensive to give away shares
but actually forever
you've then got that person with a stake
in your business and
it doesn't necessarily deliver what
there's all the antidotes isn't there
about the people who have
done work for google and apple and
things like that and been paid in shares
and
you know and then suddenly there's a
very expensive
um piece of work that they did yeah yeah
so it's i mean is it
it's something to be wary of as well as
it being an option in terms of
yes just give it it's not don't give
away equity lightly
and in terms of particularly when i
would say when it comes to investors
further down the line
i'd be wary of ones that are not going
to put money in the table versus ones
that are
that are giving time no that is not an
option but if you've generated something
that's
delivering a bit of success yeah it's
certainly
not something to give away lightly i
think you need to always be very careful
about who
you want to own a part of your business
so whether they put money in or not
you're going to have be in a
relationship with them for a long time
and so if someone has come along and
done something
and in return you give them some shares
they're involved forever
um you know or someone's got to buy them
out and and that can have
you know knock-on effects when later on
a year two years down the line you're
trying to raise some money
there's now another investor there's
someone else whose
opinion or whose involvement has to be
dealt with
um if you're trying to you know sell or
or do other things you've got these
people involved so
and the buyer really comes in sweat no
yeah just on to factor four i know we've
touched on it the image
of the company thing do you think that
is genuinely a big thing in terms of
numbers or um
personally i don't but i do know that
people
do look at those things and that's why
there are a lot of companies with a
thousand
pounds of share capital or ten thousand
pounds of share capital
instead of just a hundred or one but you
know realistically
is the company so much more financially
strong because it's got 10
000 shares an issue um instead of 100
or a thousand shares it is just
um perception but you know to some
extent people do that with plcs
you know the word plc as uh
people think that is a more substantial
company than
a limited company but it is just the
name and it just as easy
for you and i to set up a plc um
and put a few pounds in as it is to set
up a limited company there
there's a little bit more to it than
that but realistically
a lot of people when they set up plc's
they're doing it for the
you know the marketing aspect the the
perception aspect
not you know no intention of ever
actually floating on a
on a market which is the main purpose
for having a plc
the one caveat to is you've got to
remember the liability point as well
don't you in terms of if you have a
higher
number of shares and share capital
there's a liability aspect
there is bottle you are limited to what
you paid for the shares yeah
so you know your liability is still
limited to what
the value of the shares is and provided
you've paid for them so if it is
you know 5 000 penny shares that cost 50
pounds if i put
once i put up my 50 pound yeah my larger
that's the denomination they have so
like classically that would be 100
shares a pound
yeah if you want a bigger share if you
want a bigger number of shares
don't forget to maybe drop down the the
denomination the denomination yeah the
number of values
yeah a thousand oh one number shares i
think there's a thousand pounds we've
got to come up with right yeah
yeah 100. and you are able to
um later on in the life of the company
you can subdivide shares so if we
started off
with 101 pound shares we can
there are there is a mechanism for us to
change that
to ten thousand shares yeah uh we don't
have to stick with it forever
but again it's one paper work and that's
so if you think you're going to do that
why not do it from the outset when it
wouldn't cost you anything
yeah and that's that's sort of the
future-proofing bit and the presentation
part
and the concept of the the share
premiums
element in terms of when's that have you
seen that typically
very often with startups and early stage
businesses so
for example if you and i are starting up
in business
and we're going to be doing all the work
but we've got someone with money who's
going to
fund it and we're going to have it a
third each so
let's just pick a number we need a
hundred thousand pounds to get this
business off the ground
someone's gonna put in a hundred
thousand pounds for a third of the
business
um we haven't got a hundred thousand
pounds each
but we also are going to have a third of
the business
so you can either try and do it with the
timing of it that we are going to pay
for our shares at a different time but
at a lower rate so
if we're going to have 100 shares
for 100 pounds or 33 shares rather for
33 pounds i put my 33 pounds in you put
your 33 pounds in
yeah our money man comes along and he
puts a hundred thousand pounds in
but all he gets is 33 shares as well
then that's where he's got a whatever it
is 99
977
67 pounds uh share premium on top of
the 33 pounds for the share so that's
how you will see premiums
very early on in the company is where
the particularly the founders maybe
don't have the funds
so they put in a nominal amount of money
and the money people come in and they
get exactly the same number of shares
but they paid a significant premium over
the nominal
pound or payments are there any
potential impacts of that later on down
the line that people would need to be
aware of
no not really no i mean it's it's still
the part of the share
capital of the business so it
strengthens the balance sheet it's real
money that's gone into the company
100 000 pounds um and the various things
later on that the difference between it
being share capital or shared premium
doesn't doesn't prevent you from doing
anything
in the future yeah and we've got we've
got another video around understanding
limited company accounts so in terms of
that is probably a good example that we
show there of
how that can strengthen the balance
sheet in terms of the share premium
exactly at that point
yeah and the fine the final factor we
wanted
to talk about was the the types the
types of shares now i think everyone
thinks of
particularly limited company ordinary
shares but there
are lots of other different types of
shares
and i suppose the obvious first question
is is why
and as we talked about there that the
sort of four of the top reasons are
attracting investment amending a voting
rights and we'll
give that a bit more flesh in terms of
when you go through the specific
examples but
different voting rights can come with
different types of shares
you can pay similarly you can pay
dividends in different types of ways
with different types of shares
and it's also a mechanism a lot of
companies use to try and give incentives
for staff
staff to stay in terms of they attach
shares to
as part of at least the longer they stay
they'll get shares further on down the
line yeah rather so just it's an
incentive
together with their salary obviously
this is a good company to work for and
you stick with us
we generate success you'll share in that
success
yeah so these run down the line as the
slide there shows that the two
sort of company law um references to
shares would be
ordinary share capital which is
generally
that's as it says the ordinary shares
one person one vote one person one
pound of dividend that gets distributed
with the profits and that's you know
just everybody
sharing equally in the success and
whatever
of the business the the other type of
share is a preference share
which is by its name is there is some
form of right
preferred right attaching to that share
rather than the ordinary shares
and that might be they have a higher
percentage of votes
it might be they get more of the capital
on a sale
it might be they get more of the
dividends of the profits when they're
distributed
they might have an actual fixed interest
rate attaching to them so they get
a guaranteed amount of return and those
are the sorts of things that when you're
looking for investors giving them some
sort of preference making sure they get
the first
x pounds of profit is distributed to the
preference shares
or allowing them twice as many votes or
whatever so those are where
the preference shares come in um and
then the other one the alphabet shares
that's where usually they will be
ordinary shares but you then have
ordinary a shares ordinary b
shares ordinary c shares that's why they
have the name the alphabet shares and
people would use that because
it's more of a tax planning
mechanism where you and i could have the
business
50 50. you own 50 ordinary shares i own
50 ordinary b shares
and what that would allow us to do then
is to reward each other
in different proportions to how we own
the business
so although we might own the business 50
50
you're working in the business more than
i am so
we can agree that you can have a bigger
share of the profits
than i have because the age shares we
can vote
differently um you do need to be very
careful with those that
for obvious reasons the tax man does not
like alphabet shares
um but it very often that's how they
again
structured from the beginning you might
not be thinking you're going to do that
but that future proofing bit again is if
there's three of you setting up in
business together
why not do a b and c shares
you all have the same voting you all
have the same dividends
unless later on you decide you don't
you've got that flexibility then to be
allowed
to create a different structure and that
sort of brings everything quite nicely
it's that it's that flexibility point in
terms and there's a lot of information
into i think
a lot of people through and they will
hit a lot of companies will just set up
100 shares a pound
which is absolutely fine it's just a
case of just being aware
of you want to create that flexibility
if you can from the beginning
because making you can make changes
later on
but it's going to be take some time and
it's going to be some costs
and the longer you've been in business
probably the more complex it's going to
be
so you want to get it why not get it
right from the outset you do as well
because once you've
once the business is up and running and
actually started
then playing around with shares at that
point can trigger
um tax issues it can trigger other
company
uh company law issues you know but if
suddenly you said oh actually
i now want you to have some b shares
because you're doing more than i
am and we want to give you some more uh
i think well the tax man looking at
saying
well because you're giving him shares
they've got a value
you'll end up getting a tax liability
because we've issued some new b shares
further down the line so again it is
worth spending some time
thinking about what might we want to do
in the future what are
what what options are open to us so that
you can then
create those shares and set it up from
the from the off
and it you will even after that thought
process you're probably going to still
you want to keep the mass easy you want
to keep it simple but you want to have
gone through these factors
so that your end result is the right one
for your business and it's where
we've got another video on do you really
need an accountant
it and without and that's an
an important thing thing for us to talk
about as in you kind of say
there's no problem at all with setting
up a company i don't know you've got
other
friends who started one up just do 100
shares a penny or a pound
absolutely fine however what an
accountant may help you do
is just go through the thought process
of why that is the right thing for you
or whether there's potentially another
yeah because they're the same
you're setting up in business for the
first time you don't you you won't have
the experience
that hopefully your accountant or lawyer
does have
and say well actually some people you
know
three years down the line they realized
they wanted to do x
and it's more difficult because they
didn't think about it at the beginning
so
again whether it's an accountant or a
lawyer or a someone you know in business
just asking around getting a bit of
advice about
how how should we set it up and
structure it too as i said for that
future proofing and that flexibility
later on
yeah so hope that's been helpful
um on the on the question of how many
shares your
startup should have uh please subscribe
uh and you'll get some other videos on
on this subject and others around
how to get your business uh established
and going uh but i hope you've enjoyed
this one
and we'll see you again