Participating Preference Shares??!!! What?!

Cap Table - Part 3

If when you're reading about "Participating Preference Shares", you're like: What?! This post is for you.

This is Activate Ventures LLP’s third post on cap tables. In order to understand the cap table, UK founders need to understand the different types of securities and the other terminology. Okay, we know this is dry and boring, but please hang in there. Every founder needs to understand this. Really.

Types of Security

Companies in England and Wales generally issue three types of shares: ordinary shares, preference shares, and redeemable shares.

There are no restrictions on the name you give to the share classes – you can get creative! However, most people chose standard naming (ordinary shares, preference shares, etc.). You can also assign a different nominal value to each share class, i.e. one class could have a nominal value of £1 per share while another is £0.01 per share. We recommend founders keep it simple initially. The more complexity, the

greater the administrative burden and costs.

Ordinary shares: These are the shares that a company starts with when creating the entity at Companies House, and which the founders and employees own.

Preference shares: Like the name implies, preference shareholders receive preferential return upon the liquidation or sale of the company. Investors (typically, the venture capitalists) hold preference shares. Preference shares are not compatible with SEIS/EIS tax deductions so you do not see them in angel investor rounds. There are two types of preference shares, participating and non-participating.

• Non-Participating Preference Shares: Non-participating preference entitles the investors to the higher of either (1) their initial investment and accrued dividends only, or (2) the amount the shareholders would receive if they convert to ordinary shares. These shareholders have the choice to share the liquidation or sale proceeds.

• Participating Preference Shares: When the company is sold or liquidated, participating preference shareholders get back their initial investment, and accrued dividends, and the right to get additional payment representing their participation in the remaining proceeds from the sale of the company. It should not be a surprise that the holders of these shares are the venture capitalists.

Convertible Preference Shares: A type of preference share that gives investors the option to convert the preference shares into a fixed number of ordinary shares after a specified

date or trigger event such as company sale or initial public offering.

Redeemable shares: Companies can buy back redeemable shares at a future date. Shareholder have the right to sell or transfer the shares subject to the articles of association or shareholders agreement. They can be ordinary or preference shares. The shares being redeemed must be fully paid. And, once redeemed, these shares must be cancelled.

We know, we know, it's a lot. So we are going to take a break now and next time we'll continue with some more (boring) but helpful terminology for cap table.

If you need help with your startup finances or cap table, talk to one of our teams to find out how we can help.