Introduction
Share classes are a fundamental component of your cap table structure. This article explains how to set up and manage different types of share classes, including regular and deferred shares, and how to apply appropriate parameters to each class.
Adding a share class
To add a new share class to your company:
Navigate to your company page and select Ownership from the left menu
Click on Share classes
Click Add share class in the top right corner
Configure the share class parameters in the popup window
You can either use a Default class name or click Use custom class name to give a custom name to any of your share classes.
Voting right
Click the toggle (turn it purple) if the share class has a voting right. This means stakeholders who own shares within this class can weigh in on decisions about the company's future. Once activated, you need to add a voting weight in the new field opening below:
Here is an example to understand how it works. If the voting weight of share class “A” is 1 and the voting weight of share class B is 2, then, with the same number of shares, stakeholders having share class B will have twice the votes of stakeholders having share class A. You can see the number of votes (issued shares x voting weight) per stakeholder in the cap table. Votes are integers and will be rounded down if needed. You can see the votes in total numbers and in percentages.
Dividend right
Click the toggle (purple) if the share class has a dividend right. This means stakeholders who own shares within this class can receive income distributions through dividend payments if these are declared for a certain period.
Liquidation preference
Dictates the payout order and amount in the exit event. It usually serves as a way to protect investors, especially in the case where exit valuation is lower than expected.
Seniority: Owners of shares with the highest seniority are paid first - the higher the number you input in this field, the higher the seniority, and the earlier the stakeholders with this share class get paid out in the exit. For example, if you have 4 share classes, the one with Seniority = 4 is the one that gets paid out first.
Multiple: defines the multiple of the investment that is paid out as a liquidation preference. For example, if the investment was 1 million and the multiple is 2, the amount that needs to be paid out to these investors is 2 million.
Participating: determines if this share class also gets a (pro-rata) share of the proceeds that common shareholders receive. For example, if the investor owns 50% of the company, and the proceeds allow for common shareholders to also receive a payout, the investor with a participating liquidation preference would receive 50% of what is paid out to common shareholders.
Cap: is linked to a participating share class and indicates that the stock will participate in the proceeds until a certain cap of this factor times the investment is reached. When the cap is reached, a higher payout can only be achieved by converting to shares without a liquidation preference. For example, if the investor owns 50% of the company with an investment of 1 million, has a participating liquidation preference with a 2x cap, and proceeds allow for common shareholders to receive a payout, the investor with a participation liquidation preference would receive 50% of what is paid out to common shareholders but the total amount that can be paid out to them is capped at 2 million (2 times their investment amount).
Interest: determines the amount of interest accrued, yearly non-compounding.
Days per year: determines how the non-compounding yearly interest is calculated - on the basis of 360 or 365 days per year.
Conversion ratio: a multiplier that increases the number of shares a stakeholder will receive when converting to common shares during a liquidity event. This effectively increases the ownership of preferred shareholders. A ratio greater than 1.0 will increase the number of fully-diluted shares shown in the cap table.
Anti-dilution
Defining anti-dilution and issuing shares from this share class, these shares will be categorized as "Preferred shares".
Hurdle
The hurdle share price is the level above which the beneficial owner of a share with that share class will have full economic rights to the company shares in question.
For example, the company is currently valued at €1 per share, and you want to issue shares to an employee. The hurdle share price carries a small premium to reflect the expectancy value of the shares - so in this instance, it could be set at €1.20.
The hurdle share price is the hurdle the recipient must overcome for their shares to carry value, as any value above their hurdle is theirs to keep.
To learn how to create and grant hurdle shares, please read this article.
Custom nominal value per share
Use a custom nominal value to create conversion factors between classes.
You can now set conversion ratios at plan level. This is relevant when you have, for example, 1 common share = 100 VSOPs.
To activate this feature, please follow the steps below:
Go to Equity Plans - Pools & Plans
Click the three dots next to the plan with a conversion ratio
Scroll down to Other options
Activate Custom conversion ratio to stock and apply conversion ratio
Note: When importing data, you can create share classes with just the name first. This allows you to properly assign transactions to the correct share classes.
You can then return to edit all share class parameters later on (like voting rights or liquidation preferences) after completing your initial import.
Enabling deferred shares
Adding deferred shares will create a share class that will be excluded from the diluted share capital. This means that deferred shares will not dilute your cap table.
To enable deferred shares
Click on the Ownership tab
Click on the Share Classes page
Click on the "Add deferred shares" button
Click "Confirm"
Remarks
Deferred shares can't be used as a pool underlying share class
Only one deferred share class can be created per account
Editing a share class
To edit an existing share class, please follow these steps:
Go to Ownership > Share Classes
Identify the share class, click the three dots and select "Edit"
