Transfer Shares vs Issuing New Shares
This article will discuss everything you need to know about transferring shares vs issuing new shares.
Planning to become a shareholder in a company soon? Or maybe you are planning to issue shares in your company? If the answer to these is yes, then it’s a good time you understand the details of the difference between issue and transfer of shares.
This article will discuss everything you need to know about transferring shares vs issuing new shares.
Let’s first cover what company shares are and why companies place such an importance on its shareholdings and equity management. This knowledge will serve as the foundation of the choices in your company when it comes to dealing with new shareholders as investors or employees, and how to navigate this minefield in the corporate world.
What are Shares in a Company?
Shares in a company represent the company ownership, ie. how much part of the company you own. In most cases, companies tend to issue shares for raising money from a variety of investors. Companies utilize this money to develop and grow their business for long-term profitability. Businesses issue different share types such as ordinary shares, preference shares, participating or non-participating shares, equity shares, convertible preference shares and others.
These shares enable shareholders to obtain a stake in a company’s profits and equities while also allowing them to vote in shareholder meetings. Let us take a closer look at these shares to understand what makes them unique and which one you should opt for.
People who hold preference shares often get a priority over common shareholders when it comes to dividends and other similar elements. There are a variety of preference shares and each of them has different characteristics and rights. Anyone who holds these shares get perks like restricted voting rights and fixed periodic dividends. However, these benefits depend on the preference share’s specific terms as set out in the preference class.
Also referred to as ordinary shares, equity shares are a partial ownership in which each member owns a fraction of the shares and receives this portion of the company profits, if any. What’s more, equity shareholders have the right to vote.
An equity share capital stays with the company, and the shareholder will only get it back once it closes. Another thing that makes equity shares so attractive is that the shareholders get voting rights and have the power to choose the company’s management.
Plus, equity capital’s dividend rate massively relies upon the company’s profitability. That said, the equity capital’s dividend does not have any fixed rate.
Cumulative and Non Cumulative Shares
When it comes to cumulative shares, issuing companies have to track and pay dividends to the preferred shareholders if they didn’t receive their payments in the previous years. If a company starts to pay out for dividends, the shareholders who possess cumulative preferred shares will get every missed payment before the common shareholders.
On the other hand, anybody who holds non-cumulative shares does not have any right to get past dividends if a company starts issuing dividends once again. The company can also pay common stock dividends as long as the cumulative shareholders are getting their cut on time.
Participating and Non Participating Shares
Any individual who holds a preferred stock receives preferential treatment. Whenever a company acquisition or buyout takes place, these shareholders are the first to get paid before common stockholders. Participating stock holders can get a share from any liquidation proceeds that remain. On the other hand, non-participating stock holders can either get the amount they would have received after converting to common stock or they would have received during liquidation.
In most cases, people tend to opt for participating shares as the perks are better and the returns are higher.
Convertible Preference Shares
Convertible preference shares are essentially fixed income securities investors can opt for, to convert them into a particular amount of shares from the common stock of a company after a predetermined date or period. What’s most impressive about this type of share is that it provides shareholders with a stream of fixed income along with the invested capital’s protection.
Issuing New Shares
Issued shares are shares bought and held by a company’s shareholders. You don’t necessarily have to be an insider to get issued shares as they are also available for the general public after its IPO or institutional investors, when it’s still private. These shares consist of the stock a business sells publicly for generating funds and capital insiders receive for compensation.
Companies issue shares just once, after which investors are free to sell it to other investors. Whenever an organization buys its own shares back, it becomes an issued share, despite being a “treasury share”. You need to have a share issue certificate to prove that you received your share allocation.
Why do Companies Issue Shares?
There are many reasons why a company issues new shares, be it for new investments, to help retain key employees, or others. In the end these methods to issuing shares work to grow the company and allow it to expand in the long term.
Here are some of the reasons why companies issue new shares:
- New Investments – Large corporations may need to create extra shares for bringing in new investors to provide them with some equity. Companies often do this when funding new projects, expanding business operations, or increasing staff members.
- Forming a Private Limited Company – To start a private limited company, you have to issue multiple shares and distribute them amongst investors and directors. Nonprofit organizations, charities, or any other company restricted by guarantee are the only exceptions in cases like these. The amount of shares provided to each shareholder usually reflects their contribution’s overall value, which could be in terms of experience, skills, or initial investments for setting up the company.
- Employee Share Schemes – Many companies provide their employees with shareholder contracts in exchange of statutory redundancy pays, unfair dismissals, and similar employment rights.
- Bargaining Chip for Business Deals – Companies often issue new shares for offsetting debts. Some organizations even utilize them as bargaining chips when trying to acquire other businesses. New business partners often ask for a certain amount of shares before finalizing a deal.
What is the Effect of Share Dilution?
A large number of shareholders don’t prefer dilution, and for good reason. One of the main reasons why most shareholders show reluctance towards dilution is that it reduces their ownership in the company. In some cases, investors often take a shareholder’s position by making a massive investment that overshadows their ownership.
How New Shares are issued in a Company
Companies can offer shares privately to any business or individual of their choosing. However, before doing so, the directors must decide on the following things:
- The number of shares they plan to issue
- Find out whether they are not violating any rules or regulations.
The directors also need to make sure that the issue is compliant with pre-emption rights and any other restriction present in the shareholders agreement. After getting the thumbs up to issue the allotment of shares, business or payment contracts pertinent to the allotment should be final, providing the share certificates to the chosen recipients. Shareholders can purchase shares at face value when companies are issuing them. However, some organizations sell shares for rates higher than the face value.
Companies then have to fill and submit the form SH01 a month before the allotment. They should also update the members within two months and include the shareholders’ names in the confirmation statement to make sure the allotments reflect the company’s accounts correctly.
Issue Company Shares on Eqvista
You can easily issue company shares on the Eqvista platform with the click of a few buttons.
From the company’s securities pages, which lists all the current share grants of a particular share class, click on the button “issue shares” as shown below:
You will then be guided to the next page to issue shares to a shareholder. In this case we chose to issue 10,000 shares to Mike Evans at a price per share of $1.5 on October 1st, 2020.
Once the new share grant has been issued and approved, you can go back to the security page and see the new issuance in the list.
These shares will also be shown in the company’s overall cap table for each individual shareholder.
Transfer of Shares
In addition to issuing new shares, shareholders may also choose to transfer shares from existing shareholders. But what are the reasons for transferring shares vs issuing new shares?
Let’s first cover what exactly is transfer of shares.
What is Transfer of Shares?
You can transfer shares (the current ones) to new recipients for personal or business related reasons instead of issuing them. Oftentimes, shareholders relinquish a portion of their shares, transferring them to another business partner to get them to come on board. Some shareholders also transfer a part or their entire share to a member of their family as a gift.
You can also sell your shares for cash or for getting shares in other businesses, which is a big reason why many shareholders prefer transfer of shares instead of issued shares.
Why Might Shares Need to be Transferred?
Quite a lot of people ask the question “why transfer shares”. That is precisely what we will discuss down below:
- When New Investors Step in – Established organizations could create more shares if they plan to add new investors. Companies mostly do this when expanding their operations or for funding new projects. While some companies issue new shares for a new round of investments, others transfer their shares to avoid any share dilution for their existing shareholders.
- Employee Share Schemes – Some organizations provide their employees with shareholder contracts if they agree to give up a few employment rights like unfair dismissal and statutory redundancy payments.
- Negotiation – Companies tend to transfer new shares to offset their debt. Some also transfer shares as a negotiation tactic when attempting to purchase another business.
- Forming a Company – Starting a company requires you to transfer shares and distribute them amongst investors. The amount of shares provided to every shareholder usually reflects their contribution in terms of experience, investment, skills for setting up the company.
Transfer Shares on Eqvista
Like the issuance of new shares, transferring transfers on Eqvista is also an easy and seamless process. While in the platform, click on any share grant of your shareholders, and from the “action” bar, go to “transfer shares”, as below:
Once you click on transfer shares, you will have the option to undergo a partial transfer or full transfer, with the provided details, like the share price, as below:
Once the transfer of shares is complete, you can go back to the company securities and see that the new share certificate has been issued with the updated details.
With three easy steps you can issue and transfer shares on the Eqvista platform and start to manage your company equity all online.
Transfer Shares or Issued Shares – Which one is better?
There has been a lot of debate regarding “transferring shares vs issuing new shares” for many years. Choosing one over the other wouldn’t be a wise choice as both of these shares have their benefits. For instance, transfer shares allow shareholders to purchase a shareholding that already exists. On the other hand, issuing new shares allow shareholders to join as investors, raising the equity for the company’s overall growth. However, you need to be aware of the ins and outs of the issuing new shares process for that.
If you are an existing shareholder, you should be cautious of share issues or share transfer if any of these processes impact your ability to make the right decision or dilute your control over the company. What’s more, allotting or issuing shares lead to the creation of new shares which get distributed among shareholders when a company is setting up.
Now that you know the difference between issue and transfer of shares you can become a shareholder and have complete confidence when choosing someone to partner with.
Manage Your Company Shares on Eqvista
Once you have determined which share process is right for your company, you can manage all the details on the Eqvista platform. Our equity management and cap table software are specially designed to suit not only issuing and transferring shares, but also with allotting new shares, repurchasing shares, creating new options, warrants, convertible notes, and also financial modeling as well. Check out all the features of our software or contact us today to know more!