This article explains how to easily add and edit share classes and what the terms mean.
Table of contents:
There are two different methods to add a share class:
- Adding a share class from the Share Classes page
- Adding a share class when creating a single transaction
Adding a share class from the Share Classes page:
- Go to your company and click on the Ownership tab on the left side menu
- Click on the Share classes page
- Select Add share class in the top right corner
- In the window that pops up you can then select the different parameters that go with the share class, these are:
Voting right: Click the toggle (green) 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.
Dividend right: Click the toggle (green) 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 a basis of 360 or 365 days per year.
Anti-dilution: this provision can protect investors from their investment potentially losing value (especially in the event of a down-round), as well as influence the voting rights and control of the company (this is usually tied to the amount and type of shares owned by a given shareholder). The most common types of anti-dilution provisions are full-ratchet and weighted average (broad or narrow), and these influence the way the conversion price from preferred to common stock is adjusted.
- Full ratchet: with this provision, investors get to retain almost the same percentage of the company as before the down-round, because here, the conversion price equals the down-round's conversion price.
- Weighted average (broad or narrow): acts as compensation rather than recuperating early investor losses (like full-ratchet), the formula (for both broad and narrow) takes into account the number and price of the new shares issued in a down-round.
For more detailed information and examples on how these are calculated, check out our blog on anti-dilution.
Tax value: the value at which the share class should be taxed. In certain situations, one can agree on a different tax value per share versus the share's nominal value. For example, if you would have 1000 shares with a nominal value of €1 each but a tax value of €0.1 each, then the total value to be taxed would be 1000x0.1 = €100.
Note that you can easily add a share class without the entirety of the parameters filled in to get started with the rest of the import on Ledgy, and then come back to the share classes and edit them to have the right parameters later on. To get started it is most important to just create the different share classes you have so that each transaction has the correct underlying share class, the parameters of which can be updated afterward.
Adding one share class when creating a single transaction
- Create a transaction
- Write a name of a new share class in the Share Class field and press Enter
- The Share Class is created
Note that with this method, the share class is created only by name, and to add the rest of the parameters it is necessary to go to the Share Classes page and edit the share class accordingly.
To edit a share class:
- Click on the Ownership tab
- Click on the Share Classes page
- Go to the share class you would like to edit and click on the three-dot menu on the right
- Select Edit and fill in the parameters in the window