Subdividing shares in your startup: what you need to know
As a startup, understanding the importance of sub-dividing shares is significant. It not only maintains the fair distribution of ownership but also helps to protect the company’s financial interests. However, understanding the process of subdivision of shares can be daunting. Today, we will discuss what you need to know about subdividing shares in your startup, including when it should occur and what differences you can expect, depending on where your startup is based.
What is a share subdivision?
Share subdivision, also known as a share split or stock split, is the process of dividing a company’s existing share capital into a greater number of smaller shares. The result is that existing shareholders hold more shares but each share will have a smaller nominal value.
For example, a limited company will begin life with 100 ordinary shares. In this scenario, each share is worth €1/£1 (the actual value will depend on your company funding valuation), we’re going to split these shares into ten, they are now worth €0.10/£0.10 each. The table below illustrates this and the value that each shareholder is left with once the process is finalized.
|Shareholders||Ownership %||# Ordinary Shares||Value of Stock||# Subdivided Share||Final value of Stock|
As you can see, as long as each stakeholder holds the same equivalent of shares, their stock value does not deplete. However, when a fourth shareholder or an ESOP is created, existing shareholders will be able to maximize the value they hold because there are now more shares.
Share splitting is the opposite of share consolidation (or reverse share split), which reduces the number of shares in the company’s existing share capital. Sub-dividing shares can have many advantages for start-ups, such as increasing liquidity, making it easier for investors to trade shares, and allowing founders to manage ownership more effectively.
If you want to learn how to subdivide shares in your start-up, it’s important to understand the process and the steps involved. First, the board of directors must decide if a subdivision is necessary and prepare a company resolution. This resolution will then be put to a shareholders’ vote and if it passes, the company can begin the subdivision process.
Depending on the country in which your startup is incorporated, there may be slightly different regulations and procedures for share subdivisions. In the UK, for example, a company must file a form with Companies House in order to subdivide its shares. In the Netherlands, companies must file a certificate of registration with the local chamber of commerce. It’s important to familiarise yourself with the rules in your jurisdiction before attempting to subdivide shares.
Why Should I Sub-divide Shares?
Subdividing shares is an important process to understand if you are a founder of a startup. It allows shares to be multiplied and hold a smaller nominal value. One of the reasons for doing this would be to make the value of each share more accessible and affordable for potential investors.
Subdividing shares can also be used as a way to increase liquidity in a company, and make it easier for shareholders to trade their holdings with other investors. It can also provide an opportunity for companies to create an incentive program for key employees, such as an employee option pool, by granting them a certain number of options that can be exercised when certain conditions are met.
By understanding how to subdivide shares, you can ensure that your start-up is properly capitalized and that potential investors have access to affordable shares that are easier to trade.
How to Approach Sub-dividing Shares in the Netherlands vs the UK
The below example demonstrates how to split 100 ordinary €1 shares into 10,000 ordinary €0.01 shares.
|1. Ensure the Articles of Association allow a share split|
|The Netherlands||United Kingdom|
|Dutch law allows the subdivision or consolidation of shares. However, you will need to ensure that the Articles do not actively restrict or exclude the right to split the company’s shares.
If the company’s articles of association do not allow a subdivision then to proceed these would need to be amended.
|The Articles of Association are governed by the Companies Act 2006, s 618, and like companies founded in the Netherlands, startups founded in the UK will need to ensure that they do not restrict or exclude the subdivision of shares.|
|2. Is there a shareholders’ agreement in place?|
|Although the subdivision will leave each shareholder with the same stock value after the split as before, it is worth checking if there is a shareholders’ agreement and whether there are special provisions that need to be observed – for example, the company may need to give special notice before continuing with the subdivision.|
|3. Ensure the proposed subdivision of shares is appropriate|
|It is all very well creating millions of new shares but the benefit of increased liquidity could be undone if the number of shares would become unwieldy. It’s worth considering whether there are options other than a split to achieve the same aim.|
|4. Pass a shareholders’ resolution approving the split|
|The Netherlands||United Kingdom|
|In the Netherlands, a shareholder's resolution must meet applicable statutory criteria (as well as the criteria laid out in the Articles of Association). This may also require a qualified majority (instead of a simple majority).
Depending on the legal entity of your company this may mean that a shareholder meeting must be called at least 6 months prior to the end of the tax year and that all shares are represented by attendees.
A shareholder's resolution cannot be obtained in the Annual General Meeting.
|An ordinary resolution is required to split shares, this can simply be achieved through a show of hands at a shareholder meeting.
Your Articles of Association should be consulted to ensure an ordinary resolution is sufficient in individual cases and all shareholders and auditors (if applicable) should be notified.
|5. File your changes|
|The Netherlands||United Kingdom|
|You will need to register your change, or proposal, with the Netherlands Chamber of Commerce (KVK).
An electronic certificate from a government certificate provider will need to be included.
|At the moment the SH02 form needs to be submitted either using the Companies House document upload process or on paper. You will need to complete sections 1, 2, 4, 7, and 10 and sign at section 11. When using Inform Direct the relevant sections are completed for you leaving you to just sign the form before sending it to Companies House. Once completed and signed, the form can currently be uploaded to Companies House using their document upload service.|
|6. Update the register of shareholders|
|The register of shareholders (also referred to as the register of members) will need to be amended to show the number of shares held in the new nominal value by each shareholder.|
|7. Issue new share certificates|
|You can now notify shareholders that a share split has taken place and enclose a new share certificate. Increasingly, a new certificate is what shareholders will expect to receive.|
If you are at all unsure about any of the steps or the consequences then you should take professional advice from an accountant, solicitor, or another professional.
Looking for an easy way to manage your startup equity and shares? Talk to WE.VESTR today or schedule a demo to find out more.