Share Structures For Startups

How to divide and conquer company ownership

When opening a company one key question usually becomes ‘what type of shares do I need’ or ‘what type of shares would you like us to create’.

This question can be confusing and lead to uncertainty and more questions. Invariably the answer depends on the outcomes you are looking to achieve.

What share structure is best for your new startup?

What types of shares can I use for my new company?

Generally, there are three types of shares that can be used when incorporating a new provincial or federal company in Canada. They are:

• Common Shares – typically these are voting shares and determine who controls voting the directors into office, among other things.
• Preference Shares – these shares are normally non-voting and used to finance the company without showing debt on the books.
• Special Shares – these are a hybrid of Common and Preference shares and can be created to manage whatever needs or priorities of importance.

Why do different share classes exist?

Share attributes can help determine how things are handled or what rights shareholders are entitled to. The creativity in structuring a startup or in preparing a reorganization comes with the differences that can be set up in these share attributes for the three listed above:

• Voting vs. Non-Voting: who can vote the directors on or off the island?
• Assets on Dissolution: who gets the assets if the company is shut down and dissolved
• Redemption: can the shareholder require the company to buy the shares back at any time?
• Retraction: can the company require the shareholder to sell the shares back at any time?
• Dividends: are the shareholders entitled to dividends annually, which types of shares have priority to dividends

What share structure is best for me?

Choosing the right share structure is important but should not be an exercise in perfection. A simple conversation with your accountant or lawyer before choosing is always worthwhile and they will probably ask you these questions:

• Is this going to be an “operating company” or a “holding company”?
• Do you plan to pay dividends out to yourself and maybe others (ie. a spouse)?
• Is there a planned exit strategy?
• What is the likely revenue planned to be in the first 5 years?
• What are some of the concerns or worries you have about the business or the structure?

Most startups are opened using a Common Share structure, and given that Amendments can be made relatively easily in owner-operator businesses this seems to be the standard. Where there are multiple shareholders it would be worth a phone call to an accountant or to a lawyer to figure that information out.

Ensuring you have a share structure that provides your accountant with flexibility in managing your accounting needs or the flow of funds to shareholders is important.

Get some guidance, make a call to ensure you are doing it right once, and get to a decision quickly without worrying about wasted time.

Joseph Chiummiento
905-851-8180, ext. 2
joseph@corelawyers.ca