Usually when you give employees equity you'll do so in the form of Share Options, rather than giving shares. That's because, after a funding round, the shares have a value, and giving shares creates tax issues.
But, in the early days of the company, when a new co-founder, CTO, etc., joins, you often want to give them equity.
At SeedLegals, we often get asked the best way to do that. The good news is
Two important points for giving out equity:
- You don’t need to transfer existing shares already owned by one or more of the current shareholders. In nearly every case, the easiest and best way to give shares to a new shareholder is to issue new shares. Allocating new shares is faster and involves less hurdles than transferring shares out of the founders’ holdings. For example, if you own 100 shares in a company, and own 100% of the shares, but would like to give your co-founder 50% of the business, rather than transferring your new co-founder 50 of your shares, it’s much easier to issue 100 new shares to them; you will still have 50-50 ownership in the company, but will have achieved it with much less hassle.
- If you want to give equity to a new co-founder or other team member, it’s easiest to do this prior to your funding round, rather than during or after. Once your funding round is complete, any future allocation of new shares will likely be subject to a number of limitations, due to what was negotiated in your articles of association and shareholders’ agreement. This means that allocating new shares will involve more paperwork, more signatures, and in some cases might not even be possible. If you have a co-founder, advisor, or any other party you are certain you want to allocate shares to, the best time to do this would be now, before your next funding round.
The process of allocating new shares is quick and easy:
In order to allocate new shares in your company, you’ll need first fill in an SH01 form.
- Ensure that you have all your relevant company information, and then follow our quick step-by-step guide to ensure every box is filled correctly!
Next, you’ll need a Written Resolution (we don't have this as a standalone document on SeedLegals just yet, contact us if you need this).
- This is a signed document which provides a record of the fact that the company had the authority to issue these new shares under the SH01. Once this is done, send both the SH01 and Written Resolution to Companies House, so that it is valid and filed on the public record.
In some cases, you’ll need an investor consent notice.
- If you are pre-funding, there’s no need to worry about this so long you and your fellow cofounders are all in agreement. However, if you have investors, then it may be necessary to have a signed document which proves that your shareholders have consented to the additional allocation of shares, depending on what their contractual rights were when the purchased their shares.
Lastly, you’ll need to create and sign a new share certificate for your new shareholder.
- You can do this by creating a new Historic Round in the SeedLegals cap table which then automatically updates your share register and generates a share certificate for the new shareholder.
That’s it. Follow those steps, and you’ll have your shares allocated in no time!