Note: This post is the second post of a two-part series on the topic of Share Capital & Design. Read Part 1 here.


Shares = equity = ownership. True, but this is really just the beginning. Even at start-up, it’s worthwhile for Founders (especially if this is their first venture) to get a good understanding of what their shares can and cannot do, what rights and restrictions attach to each share and how changes can be made to their shares down the road.


Designing your Shares: Rights & Restrictions.
Hard to believe, but there is some actual “design” that can go into your shares and capital structure (outside of the set of “fundamental rights” described in last month’s post that must be attached to at least one class or classes of shares). Shares are “designed” by giving attributes generally in the form of economic and/or governance rights.


*Economic Rights. There’s a lengthy list of options here, but a few of the more common ones are designing shares with the rights for:
>Dividends. Dividends can be fixed, cumulative or participating, or some variation thereof. They can also be payable in cash, in specie or in stock. The participating attribute is one to watch, since a Participating Preferred Share (for example) provides for further participation in the earnings of the Company after the dividend is paid to the Preferred Shareholder. This is in contrast to a non-participating Preferred Share, which would typically provide only for a fixed dividend amount.
>Conversion. The ability to convert one class of shares into another class of shares (i.e. Prefs to Commons) based on certain conditions which may be fixed or floating in terms of the resulting, as-converted number of shares and may also be tied to certain triggering events (i.e. convertible upon a sale of the Company).
>Anti-Dilution. Typically tied to the conversion right to protect shareholders holding convertible shares from the actions that would make their conversion right less valuable. Special caution should be taken here since you do not want to create restrictions that would inhibit an equity investment or capital reorganization down the road.
>Others. Redemption, Sinking Fund, Retraction, Purchase by Corporation, Tracking and more.


*Governance Rights. This is often seen to be the most important right of a shareholder, being the right to:
>Vote. The ability to have a say in the decisions of the Company is a powerful right to be given or not to be given to a class of shares. It’s a right that can be modified or designed to fit a variety of circumstances (i.e. a class of shares may only have this voting right if the Company’s fails to pay dividends) and can be governed by the terms of a shareholders’ agreement where the shareholders agree to vote their shares in a certain way. Additionally, under corporate law ALL shares regardless of whether they have been given the right to vote in the Company’s articles, have the right to vote on certain “fundamental changes” affecting the Company (i.e. on the Company’s sale, dissolution, amalgamation or continuation into a new jurisdiction).


Commons or Prefs? Economic or Governance rights? What matters most to you for the design of your Company’s shares? Share your comments below, we’d love to hear from you.

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