Your startup has reached the point where you’re looking to raise capital from investors or offer shares to secure talented employees and you’re wondering, ‘how exactly do I issue shares for my startup?’
Assuming your startup is incorporated and you have taken into account the legal and commercial consequences of issuing shares, then this step by step guide will assist you in issuing shares or at least understanding the process if you decide to engage a lawyer.
Step 1: Work out the class and number of shares you want to issue
Work out how many shares you are willing to issue with reference to how much capital you need to raise. In general, shares should be issued at their market value. There may be tax implications if shares are issued below this price, if you are looking to do this, it may be necessary to engage a lawyer. You also need to decide on the class of shares to be issued which can impact voting rights and dividend distribution.
Step 2: Check your company’s governing documents
The exact process for issuing shares varies by company based on requirements in the company constitution and the shareholders agreement (if it already exists). If the issuance of shares are not dealt with in the company’s documents, then the replaceable rules of the Corporations Act 2001 (Cth) apply.
Standard requirements include:
- Board approval for a share issuance;
- Existing shareholders are offered the new shares before they are offered to a third party. This is known as the ‘preemptive right’ of shareholders.
- It may be possible to waive shareholder’s preemptive right according to the company’s constitution or replaceable rules. This will generally require the board to pass a resolution.
Step 3: Shares are offered to existing shareholders
In most circumstances, it is necessary to offer the shares to existing shareholders before third parties. This will usually take the shape of an issue notice which details the number of shares offered and the duration they are available. Within this time frame, existing shareholders can exercise their preemptive right to purchase more shares.
Step 4: Shares are offered to third parties
The remainder of the shares offered to existing shareholders (or all of the shares if the preemptive right of shareholders is waived) are then offered to third parties.
Step 5: Share issue is formalised
The necessary documents need to be prepared and signed to formalise the share issue. In general, you will need either:
- A Share Subscription Agreement: Details the terms of the share issue and company and founder warranties. The company warranties provide investors with confidence without requiring them to complete extensive due diligence into the company. A Subscription Agreement is preferred for more sophisticated investments.
- A Share Offer/Subscription Letter: Details the key terms of the share issue, does not contain company representations and warranties. Consequently, the onus is on the new shareholder to do their own due diligence. This document is generally preferred for an existing shareholder and for smaller/ earlier investments (such as family and friend investors).
- A Share Application Form: Both a Share Subscription Agreement and a Share Subscription Letter will include an application for shares. This documents the number and type of shares issued and that the new shareholder is bound by the company’s constitution.
Step 6: Shareholders Agreement
Another key document, which is not required but highly advised, is a Shareholders Agreement. This document ensures shareholders know their rights and obligations and assists in avoiding and resolving shareholder disputes. It may be necessary to create a Shareholders Agreement. For more detail on Shareholders Agreements, check out our article ‘How do Shareholder Agreements work?’
If your startup already has a Shareholders Agreement, the new shareholders will need to sign a Deed of Accession to bind them to the Agreement.
Step 7: Share Certificate
Once you have received payment for the shares and all of the signed documents, a Share Certificate is issued. This is essentially a receipt of payment, detailing the shareholder’s details and the number and class of shares held.
Step 8: Update Company Register and ASIC
The company’s register, sometimes referred to as a ‘member register’ or ‘share register’, needs to be updated with the details of the new shareholders, the number of shares they hold, the date of issue, the class of shares and whether the shares are fully or partly paid.
To avoid a late fee, ASIC must be notified of the share issue within 28 days. ASIC requires details of the number of shares issued, the class of share, and the amount paid/unpaid.
Issuing shares is an important commercial and legal practice to understand as an entrepreneur. It allows you to raise funds and attract skilled employees. The key takeaway is to get everything in writing and follow the requirements in your startup’s constitution, shareholders agreement and the Corporations Act 2001 (Cth).