Classes of Shares (A, B, C)
Classes of shares are essentially a kind of listed stock separated by the amount of voting rights received by the shareholders.
There is a popular belief that publicly traded companies have the same share structure. This could not be any further from the truth. Some shares, also known as equities or stocks, offer owners more benefits in terms of voting rights compared to other company shareholders. The company’s founders can set the nature and number of share classes according to their needs.
Class of Shares
Share classes help assign a different range of rights to various stockholders. What’s more, they are capable of addressing pertinent issues like dividends, voting authority, rights to an organization’s capital and assets and much more.
For instance, a corporation might resort to issuing ordinary stock after getting only a single vote per share, assigned as a class A shares. It may then further offer executive stock with one hundred votes per share under class B shares.
What is the Class of Shares?
Classes of shares are essentially a kind of listed stock separated by the amount of voting rights received by the shareholders. For instance, a listed corporation may possess more than one share class, classified as Classes A and B. People who have owned private companies in the past but later decided to go public have a tendency of creating different class structures.
The voting rights for these structures are quite different, and they are there to ensure that everything remains in control. Some owners also incorporate voting rights to steer clear from unforeseen takeovers. The two main types of stocks that most people are familiar with are preferred stocks and common shares. For those who don’t know, common shares essentially represent the share majority available across markets.
On the other hand, preferred stocks typically come with fixed dividends and do not offer the holders with voting rights. Advisory shares are also a common stock class. Some people also know them as advisor shares. This stock type is often provided to business advisors in order to gain their expertise and insight. In a lot of cases, the advisors getting this kind of stock option as a reward tend to be either high level executives or company founders.
Traditionally, advisor shares tend to vest month by month, often over a period of one to two years with a hundred percent single trigger acceleration and no cliff.
How are Shares Defined in a Company?
One of the most essential aspects of understanding the different classes of shares is that most organizations prefer setting their share classification according to their particular requirements. Therefore, whenever a corporation decides to issue Class A and Class B shares, it often defines them entirely upon its discretion.
What’s more, it can also offer Class B shares with 3 votes. Otherwise, the company can also claim that the stock for Class A receives only half of Class Bs dividend access. These rules can only be defined as long as the terms and conditions or definitions are not violating the legal rights of the shareholder.
Types of Shares
The main types of shares used for creating share classes tend to usually be preferred shares and common shares. That said, other types of shares like redeemable shares and non voting shares are also highly popular. Let us understand what role each share type has to play.
- Ordinary Shares – Ordinary shares are the most common. The reason for that is because they have one vote for each share. Plus, they give the owner the chance for equal participation in the dividends of a company. In case the company ends winding up, all of the proceeds are equally allocated. Ordinary shares have voting rights. However, they always come after the preference shares in regards to the capital rights. You can break ordinary shares into multiple classes as well.
- Non-Voting Shares – Non voting shares are quite different from ordinary share types in the sense that they don’t have voting rights. These shares also don’t give you the right to come to general meetings. In most cases, non voting shares are often provided to employees to pay remunerations for getting improved tax efficiency
- Preference Shares – These types of shares give owners the chance to get a particular dividend amount each year. You will receive this amount ahead of people who are holding common or ordinary shares. Generally, the preference shares are according to the nominal values percentage (the overall value mentioned during the issuing of shares). Preference shares may also have liquidation rights in case of a buyout.
- Redeemable Shares – Companies issue redeemable shares on a condition that it may or will re-purchase them later on. Redeemable shares could either be fixed or set according to the discretion of the company’s director. This is often done with non voting stocks offered to employees to ensure that the company gets their shares back in case an employee leaves.
Share Class Types
As most of you may be aware, public corporations issue a variety of shares by splitting common shares. These classes could be different, depending on the company that is providing it. The funds could also play a major part in how the share class types turns out.
Class A Shares
Class A shares are just a traditional classification of regular stocks that initially had a higher amount of voting rights compared to Class B shares. That said, companies do not have any legal obligation to structure their classes of shares in this way. For instance, the voting rights for Class A shares on Facebook are generally higher. Whatever the case may be, the class bearing the higher number of rights is usually for the organization’s management team.
Common shares are owned by insiders and they usually possess better voting rights and privileges. Whenever people discuss Class A shares, they are usually talking about their Common shares. Insiders are also often in control of the A shares, have better voting power and do not trade publicly.
Instead of a stock split, firms develop Class B shares which can only sell for half the price as A shares. The downside is that Class B shares don’t have a high control. The voting power and price doesn’t necessarily have to be in proportion. For example, Class A shares could cost around $3,000 and receive 100 votes. On the other hand, Class B shares may cost up to $120 with just a single vote.
Class B Shares
Class B shares are also a common stock classification that could be accompanied by more or less voting rights compared to the Class A shares. The repayment priority for this type of share could be on the lower side, in case of bankruptcy. A comprehensive description of an organization’s various stock classes is present in its charter, bylaws, and prospectus.
The dividend priorities for class B shares are lower than A shares. Plus, as we mentioned earlier, the voting rights are less as well. That said, different classes don’t have too much of an impact on a regular investor’s profit shares from the organization’s success. Some corporations put more than 2 share classes on offer. For example, Class C and Class D. In some cases, a company may decide to offer a second share class that possesses a lower price for attracting individual investors rather than institutional shareholders.
The class A shares could have a 12B-1 fee, distribution or marketing fee compared to other classes of shares. Conversely, there are no load fees associated with Class B fund shares (mutual). Instead, investors buying Class B shares may rather offer a fee when they decide to sell their shares. Additionally, Class B shares could become Class A shares if someone decides to hold them for the long run. The 12B-1 for class B shares is significantly higher and its annual management fees is lower compared to class A shares.
Class C Shares
These shares are also a mutual fund’s shares class and are characterized by a load which includes yearly charges for servicing and distribution. Fund marketing, annual charges, set at particular percentages. The annual fee is basically a commission given to the individual or firm assisting the investor to decide the type of fund to choose.
In contrast, the front end load has charges paid when someone buys the shares and the back end load gauges the charges if an investor decides to sell shares. As far as no load funds go, they don’t have any commission charges whatsoever, and their fees simply go into the fund’s Net Asset Value.
Class A Shares vs. Class B Shares vs. Class C shares
All of the three share classes’ qualities make them suitable for different scenarios. The table below lists three essential considerations that will help you understand which class of shares would be the most suitable for you.
|12 b 1 Fee
|Low 12 b 1 fee
|High 12 b 1 fee
|1% 12 b 1
|No Load Fee
|No Load Fee
|Perfect for Long Term
|If you plan to sell shares within 7 or 5 years
|Ideal for Short Term
If you prefer a short-term share class that doesn’t have a load fee, then of course, opting for the Class C share makes the most sense. However, if long-term options are what you want, then either class A or class B shares would be ideal choices – but, it’s important to remember the different load fees these two classes have before making your final decision.
Recording Classes of Shares on Eqvista
If your company has different types of share classes and shareholders, then recording and organizing the details on the cap table should be of utmost importance. Any errors can lead to headaches down the road, as you try to back track on how many shares you issued to whom.
This is where Eqvista comes in. Our advanced equity software management system can help you record all the different classes of shares for your company.
The Summary Page allows you to have an overview of the different classes of shares in the company, and also any options, warrants or convertible notes you may have:
The Eqvista platform also has a detailed page by shareholder to see how much each person owns of your company.
The detailed version also has how many shares each shareholder has per share class, and you can also easily download the cap table to excel.
Interested in different classes of shares for your company?
The main difference between the different share classes is their varying fee structure. Giving fee or sales charges usually makes sense if there is a financial professional there to give you advice. If you are an investor, it would be best to keep your costs on the lower side and only purchase funds that match your risk tolerance and investment goals. It’s also important to keep records of your share classes on captable software.
Eqvista is one of the market leaders in providing equity management software. Eqvista can handle all equity-related activities, from issuance of common stock to exercising your company stock options, all in one place. Here is the range of activities we support. To know more, reach us today.