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There are two considerations when thinking about how many shares to create in your start-up and what the share price nominal value should be:
If you’ve already made a mistake and are looking for how to fix it, skip to the end of the article.
A classic mistake is where founders create 1,000,000 shares with a nominal value of £1 per share. That means they need to have written a cheque to the company for £1M for those shares!
For the uninitiated, the nominal value of your shares is a fixed value of each share that you decide at incorporation.
Once set, it cannot be changed without also changing your share capital. In other words, you could subdivide your nominal value from £1 to £0.1, but using the example above that would also require you to increase the number of shares in your company from 1,000,000 to 10,000,000.
When you state that your company has 1,000,000 shares each having a nominal value of £1, then you’ve represented to the world that your company has £1,000,000 in the bank. Worse still, all shares in companies need to be fully paid up, so you have also created an obligation between yourself and your company where you now owe your company £1,000,000 for the 1,000,000 shares you hold.
The reason some founders mistakenly incorporate the company with, say, 1M shares of £1 each is they think they’re that by doing this they’re setting the company valuation to £1M for, say, the valuation in the next funding round. But clearly this that can’t be the case otherwise you could just make up any number of shares and that would be the company valuation!
Rather, the company valuation is a function of its future potential, whereas the paid-up capital at incorporation is simply the value the founders paid for their shares when the company was incorporated.
In many cases founders put a lot of their own money into the business and they think that this should be reflected in the incorporation paid-up capital. But no, stay with £100 in paid-up capital, and instead treat the money you put into the business as a founder loan which, if you do your next funding round on SeedLegals, we allow you to add terms for the company to repay that loan e.g. when you reach cash-flow break-even.
If your company has incorporated with 1,000,000 shares, it is not necessarily a problem. Many founders do this. However, the important thing to remember is that if you have a large number of shares, you need a lower nominal value so the total paid-up capital in the company (being the number of shares multiplied by the nominal value) is, typically, £100. You will, therefore, need to write a cheque (or wire funds) to the company for £100.
So if 1,000,000 shares, then a nominal value of £0.00001 per share would be typical.
The short answer is you need the number of shares that results in a manageable price per share for your investors.
Here are two examples:
If you incorporated with, say, 100 shares of £1 each, that’s not a mistake, that’s actually the default way of doing things, and your next step is to do a share split, which you can do in a few minutes on SeedLegals, easy.
But, if you incorporated with a paid-up capital of, say, £1M, clearly you can’t actually pay for those shares, so you’ll need to fix that in some other way. And there are three ways to do that:
If all you have done to date is incorporate your company, but nothing else, all you will have lost is:
If that does not matter to you, the easiest is to create a new company, with a new name, but this time incorporate with an appropriate number of shares and an appropriate nominal value.
We’ve written a guide on how to incorporate a company with the Companies House online application portal here.
Alternatively, if your company already has IP, has been trading, has other shareholders, etc., then you might want to keep that company rather than starting again.
In this case there’s a process you can fill out an SH19 form that allows you to reduce your share capital. The form needs to be accompanied by a director solvency statement, a written resolution and also a statement of compliance. Once all forms a filled in you need to send them to: Company House, Crown Way, Cardiff, CF14 3UZ.
The process costs £10 and will take up to 7-10 working days. There is a £50 option for 1-day delivery, but due to COVID they are currently not offering this service.
Every so often a company incorporates with 1,000,000 shares at a nominal value of £1. This means you would have to pay £1,000,000 (via cheque or wire transfer) to the company for the shares to be fully paid-up. You cannot correct your incorporation statement (form IN01), however, you can file a confirmation statement (form CS01, previously known as the annual return) with the correct information. The CS01 should be dated on the same date as your Incorporation, so it’s clear you are just correcting the filing and not issuing any new shares.
This will not remove the incorrect data on the IN01, but it will reflect the correct picture on the records.