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.
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.
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:
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.
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.
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.
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.
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 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 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.
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.
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:
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.
The exact approvals, if any, that you require can differ from company to company. However, the key points are as follows:
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:
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.
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.
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.
There are no set rules on what a shareholders’ agreement must include, but a straightforward shareholders’ agreement for startups often covers things such as:
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.
A few predictable errors cause most of the trouble founders run into later. All of them are easy to avoid with a little planning.
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
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.
No. Shares only exist within a limited company, and a sole trader isn’t a company. To issue shares, you would first need to register a limited company with Companies House. Some sole traders convert to a limited company for exactly this reason, so they can bring in co-owners or investors through shares.
There’s no legal minimum beyond one share. In practice, many new companies issue 100 ordinary shares of £1 each, which keeps ownership percentages simple.
Issuing shares creates brand new shares, which are given to a person and increase the company’s total share capital, and is then reported to Companies House on form SH01. Transferring shares moves existing shares from one person to another without creating any new ones, and is usually handled with a stock transfer form. No new shares are created by a transfer. The two are often confused, but follow different processes and create different outcomes.
Yes. You must file form SH01 within one month of the allotment. The new shareholdings then also need to appear on your next confirmation statement. There’s no fee to file the SH01, but missing the one-month deadline is an offence and can cause issues when others run due diligence on your company in the future.
You also need to report who those shares belong to in your next confirmation statement. If certain shareholder resolutions were passed as part of the allotment, these must be filed, too. The most common are an ordinary resolution authorising the directors to allot shares and a special resolution to disapply pre-emption rights. Finally, if the issue of shares has changed your company’s PSC position, then this information needs to be reported to Companies House.
Without any agreement in place or specific terms being set at the point of issuance, a departing co-founder generally keeps their shares, unless an alternative is agreed. This is why a shareholders’ agreement and properly drafted articles matter. For example, they can require leavers to sell their shares back, often at a price that depends on when and why they left. That agreement should be in place before the shares are issued, not after the relationship has already broken down.
Yes. Under the law, a private limited company can have a single shareholder, who is often also the sole director. That one person owns 100% of the company through their shares. You can bring in further shareholders later by issuing or transferring shares.
A share certificate is a document confirming who owns a particular share or block of shares and on what terms. The company must issue certificates to new shareholders within two months of a person receiving the shares. It is evidence of ownership, but the register of members is the company’s main record of who owns the shares.
Dilution is the reduction in your ownership percentage when the company issues new shares to someone else. For example, if you own all 100 shares and the company issues 25 new shares to an investor, you now own 100 out of 125 shares, so your stake generally falls from 100% to 80% while the investor holds 20%. It isn’t inherently bad, since raising investment usually means a smaller slice of a more valuable company, but it’s worth understanding before you agree to an investment round.