A, B, C, D, E....Alphabet shares?

Cap Table - Part 4

In our last post, we learned about the basic three UK share classes: ordinary shares, preference shares, and redeemable shares. Now we will dive into more details. Ready?

Alphabet shares: Within each type of share a company may decide to create separate classes (A ordinary, B ordinary, A preference, etc.), each with different rights. For example, if a company wants to reward its employees with dividends according to their seniority or performance, it issues shares with different dividend rates per share to individual shareholders. A company can also set different voting rights with different classes of shares, such as shares with no voting rights.

It is not unusual for startups to create a new class of preference shares for each funding round each with different terms. This layering of rights creates complexity. It is important that the different share classes do not conflict with regard to priority, liquidation preference, and conversion.

Convertible notes (aka convertible promissory notes, bridge notes, or convertible debt): Allows a startup to raise a modest amount of capital quickly and less expensively than equity, typically used in the seed round. A convertible note typically is a loan from angel investors or early-stage VCs that converts into equity at a later time when a concrete valuation is set at the next funding round (e.g. seed funding round). Convertible notes can also be used as bridge financing to a later stage equity round or sale of the company.

Share options: To attract and retain talent, companies have share option schemes for employees and other service providers. The average size of share option pools in the UK is 10%-15% of total equity. Companies grant share options to employees, advisors, consultants, customers and influencers from the same share option pool. Once granted, the options vest over a set time period. There are two types of share option schemes that are the most useful for UK startups - Enterprise Management Incentives (EMI) scheme for full-time UK employees and Unapproved scheme for other employees and others.

Warrants: The right to purchase a certain number of ordinary shares at a future date at a fixed price. They are issued to investors to encourage them to participate in financings. Warrants can have vesting structures and will have expiration dates.

Okay, your eyes are now glazed over by all the definitions… But you really need to understand the language of angel investors and venture capitalists if you plan to get funding. 

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