A subdivision resolution is a document that needs to be signed by all shareholders as part of a share split, why is typically done to increase the number of shares available to give to investors before a funding round.
Why someone incorporates their company on Companies House, they usually create 1 share per founder, or perhaps 100 shares split between founders.
That's fine... until the company wants to raise funding. Then they’ll need to do a share split, here’s why:
Let's say you're raising £200K and giving away 15% equity in your company for that investment.
Assuming you had 100 shares originally, that means you're going to create 17.6 new shares in the funding round, which equates to 15% post-money equity dilution.
You can see immediately that there are two problems:
Firstly, you can't have fractional shares, so you won't be able to get the exact investment and equity dilution that you want, and
Secondly, if you're raising £200K and create 17 new shares, that a price per share of £11,764... which is a huge problem for anyone looking to invest, say, £5000. Even for someone looking to invest £50,000, they'd be thousands of pounds off their target.
The solution is a Share Split (or, as the Americans would call it, a Stock Split), where you turn those 100 shares into, for example, 100,000 shares. At the same time, you reduce the Nominal Value of each share by the same ratio, so that the total value of your shares is unchanged.
How to do a share split
The good news is that SeedLegals automates the whole process. Assuming you've built your cap table on SeedLegals already, it'll take just a few minutes to do everything - here's how:
Go to Timeline in the left menu
Click the New button at top right, select Share Split
Choose the multiplier you'd like - e.g 1000:1, and set a date for the share split.
Then, SeedLegals will instantly build your Subdivision Resolution and SH02 form.
Click sign to e-sign the Subdivision Resolution and the SH02, download and print both documents (Companies House requires the SH02 to be physically posted to them).
Post the signed Subdivision Resolution and SH02 to Companies House so they get them within 30 days of the share split.
Lastly, click apply share split to update your cap table to increase the number of shares and reduce the Nominal Value of each share accordingly.
We recommend having at least 100,000 shares before you do a funding round, so if you have 100 shares now we recommend a 1000:1 share split. Or, if you want to future-proof yourself to not have to do another share split at a future funding you might want to create, say, 1M shares.
Be sure to pick a multiplier that creates a share nominal value that can be fully represented in 8 characters after the decimal point (the maximum allowed by Companies House). For example, if your nominal value is £1, doing a 300:1 share split is a bad idea because it will create a new nominal value of £0.003333333333.... which means the total nominal value of all shares after the share split can never match the amount before. So ideally go with 10, 100, 1000, etc. as the share split.