September 24, 2018

The startup share guide: useful tips before you allocate shares

The startup share guide: useful tips before you allocate shares

Updated: 8 December 2019

Before you allocate any shares, there are some useful tips I have to share with you. 

In a hurry? Jump ahead.

First, let's start with how to become a shareholder. 

How to become a shareholder

Firstly, how can someone become a shareholder ?

Here are some examples of how to become a shareholder:

  • being listed on the company registration application; or
  • the company issuing shares to that person; or
  • buying shares from a current shareholder.

And who can be a shareholder ?

So who exactly can become a shareholder ?

Although there is no minimum age of 18 to be a shareholder (this age rule does apply for directors), your company can make up its own rules about age limits in its shareholder agreement or constitution. 

Also, a shareholder can be an entity or individual.

Another key point is the rights you can allocate to these shareholders. Read on to learn more.

Step 1: Decide what rights you are allocating

In addition to knowing who can be a shareholder, you need to know about shareholder rights that you want to allocate.

For example, see the table below for the different share rights that you can allocate to shareholders. 

Example Share Class

Example Share Class Rights

A Class

Below are some sample "A" class rights:

  • attend and vote at all meetings, one vote for every share held and on every poll one vote for every share held; and
  • participate in dividends declared; and
  • be repaid capital and participate in the division of surplus assets or profits of the company on winding up of the company.

B Class

Below are some sample "B" class rights:

  • attend and vote at all meetings, one vote for every share held and on every poll one vote for every share held; and
  • fixed non-cumulative preferential dividend at the rate of 7% per annum on the capital paid; and
  • on winding up of the company, a right to be repaid capital. No right to participate in profits or assets of the company.

C Class

Below are some sample "C" class rights:

  • the right to participate in dividends for share class; and
  • no voting rights; and
  • repayment of capital. No right to participate in the profits or assets of the company on winding up. 

As shown above, it's important to know what sort of shares you are selling (i.e. share class and the rights attached). 

Following this, the next step will be to record this in the share sale agreement. More about this step below. 

Step 2: Share sale agreement

In short, a share sale agreement documents the terms of the share sale.

So that you can explore the details that go into a share sale agreement, you can read our share sale right here

Also, in your share sale agreement, you should disclose any other share offers you have made to other possible investors.

More about disclosure below.

Disclosure of other share offers

Equally important as stating the share class the shareholder is buying, is disclosure of other share purchase offers you have made.

Take the case of the disgruntled investor that claims they were mislead about the share % they are buying. 

Because you want to avoid disputes like this, it pays to be transparent.

What's more, if you have a share sale agreement that contains warranties, it is especially important that you have not made an offer to any other investor. This is because if you breach a sale warranty then you could be liable for a claim by the prospective investor.

So once the share sale is complete, you will need to notify ASIC; you can learn more about this step below.

Step 3: Notifying ASIC about share changes

Straightaway, after your startup allocates shares, you will need to notify ASIC.

So below is the information that ASIC needs:

  • the total number of company shares on issue; also  
  • share classes, and for each class, ASIC needs to know: 
    • total number of shares for that class; and
    • amount paid up for the class; and
    • the amount unpaid for the class.

Another key point - you will need to notify ASIC of the share allocation within 28 days to avoid any penalties.

In addition to the tips above, you may be wondering about which share class you should allocate to an investor. Read on to learn more. 

Which share class should you allocate to an investor ?

So, which share class should you allocate to an investor ?

For investors that are not involved in business decisions, it makes sense to allocate shares with no voting rights.

And if you are not allocating voting rights, you should make sure that shareholders are aware of this by outlining the class of shares they are buying and the rights they hold. 

Also, you can explain shareholder classes and rights in both the share sale agreement and in the shareholder agreement 

Who should you allocate shares to ?

So who should you allocate shares to ?

Investors that want to have voting rights should have a good idea of your business vision and be in agreement with you about how you will execute that vision - this important if those investors are going to have a say in how your business is run.

Now while walking away from an investment opportunity can be tough it might be necessary if the investor's vision does not align with yours.

Also, you can allocate shares to employees to incentivise them to help your business succeed.

And, if you want to learn about the tax impact of allocating shares to employees, the Australian Tax Office provides some guidance and you can read more here.

When should you allocate shares ?

So when should you allocate shares ?

You can allocate shares to an investor once they have paid the agreed price to your business.

And for employees, it is common to allocate shares once they have worked a minimum period such as a year or two, this is usually called the 'vesting period'. 

Importantly, if you are unsure about any of the steps to allocate shares, speaking to an accountant or lawyer can be helpful.

Finally, you can contact us using the button below to discuss share allocations. 

About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, Vivian advises Australia's top entrepreneurs on business and employment matters. Clients benefit from Vivian's commercially focussed and pragmatic legal advice, business experience, and commitment to deliver the best quality business legal services to her clients.

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