As a startup founder or investor, understanding the different types of shares is crucial for determining ownership, voting rights, and potential dividends. Here are the most common types of shares:
1. Common shares: These are the most basic type of shares, and they represent ownership in the company. Common shareholders have the right to vote on important company decisions, such as board appointments and mergers.
2. Preferred shares: These shares typically have priority over common shares when it comes to dividends and liquidation payouts. Preferred shareholders often don’t have voting rights, but they do have the advantage of receiving a fixed dividend payment before common shareholders.
3. Restricted shares: These shares are typically issued to founders and key employees, and they come with certain restrictions, such as a vesting schedule. This means that the shares can’t be sold or transferred until a certain period of time has passed.
4. Stock options: While not technically shares, stock options give employees the right to purchase shares in the future at a predetermined price. This is a common way for startups to incentivize employees and align their interests with those of the company.
5. Convertible shares: These shares can be converted into another type of security, such as preferred shares or common shares, at a later date. This is often used in fundraising rounds, as investors may choose to convert their convertible shares into preferred shares if the company reaches certain milestones.
Understanding the different types of shares is crucial for both founders and investors. It’s important to consult with legal and financial experts to determine the best share structure for your startup.
