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A Guide To Raising Funds By Selling Shares To Investors

A guide to raising funds by selling shares to investors
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If your small business is looking at raising funds, selling shares may be a viable option for you. Selling shares is also often used as a solution to reducing debt, as shares can be sold in place of taking on debt from various loans and other financing options. So it is safe to say that selling shares has a lot of advantages to offer business owners.

But selling shares is not always as easy as it sounds. It is important that you thoroughly understand the processes involved before you start raising funds through selling shares. In this article, we provide you with a simple guide to raising funds by selling shares to investors.

What are shares? Understanding shares before you sell them.

Before you begin the somewhat complicated process of selling shares, you must have a comprehensive understanding of what shares are.

So what are shares? In simple terms, shares are pieces of stock that are sold or issued to investors, essentially giving investors a share in your business. You need to keep in mind that by selling shares, you are, in a way, handing part of your business ownership over to someone else. Each share gives the shareholder a percentage of ownership in your business.

Before any company issues any shares, they need to be legally entitled to do so. In some cases, issuing extra shares will need to be met with approval by your company’s current shareholders. To avoid diluting your company, you may want to offer new shares to existing shareholders first.

Drawbacks of selling shares

While there are obvious advantages to selling shares, there are also numerous drawbacks that business owners should be aware of.

By selling shares to various investors, you will be dividing up the profits that your company makes as the more shareholders there are that hold shares in your business, the more people there are that you will have to share your company’s profits with. If you are one of the company’s original owners, this will hit you the hardest because even though selling shares helped you raise funds, it definitely hurts to have to give away your hard-earned company profits to investors. These company profits may have been your direct revenue. So think carefully if you want to have all of your hard work, creativity, and innovation sold off as shares.

The other major drawback associated with the sale of shares is that the original business owners also experience a loss of control when it comes to their business. Because shareholders become part owners in your company, they have somewhat of a say about how your business operates. Shareholders may disagree with you, which may cause various problems and stresses for you and your business.

What are the different types of shares?

Not all shares are quite the same. There are many different types of shares that your business can choose to sell to raise funds, and it is important that you are aware of the different options available to you.

Some of the different types of shares include:

Ordinary shares

Ordinary shares are the most common type of share sold to raise capital for a new business. The sales of these shares are seen as permanent funding, and they cannot be repaid in most cases. Your business has the opportunity to purchase your own shares to keep control of your company. Ordinary shares offer one vote per share.

Preference shares

Preference shares are shares that ensure that control remains in the original shareholders’ hands. These shares are easily redeemable. Preference shares also entitle the business owner(s) to receive a certain amount of dividend each year, and are a way to protect the original owners of the business. However, these shares may not be very attractive to potential investors.

Non-voting shares

Non-voting shares are a type of ordinary share, except they do not offer any voting opportunity, turning the shareowner into a silent shareholder. These types of shares are often given to the employees of a business.

Corporate bonds

Corporate bonds are shares that are often issued to obtain loans. Corporate bonds will usually only interest financiers in cases in which the company is quite established. Smaller companies can battle when it comes to using corporate bonds to their best advantage.

Redeemable shares

Redeemable shares are shares that come with the promise that the company will buy back these shares at some later stage. These shares are usually often non-voting shares..

Do current shareholders need to receive the first choice when it comes to new shares?

We have an act known as the Companies Act in the UK, which states that shareholders should be given ‘pre-emption’ rights. These rights will benefit current shareholders in that they will be given first choice in new shares, which will be directly proportionate to the shares they currently own. This is also usually beneficial to the business owner as they reduce the dilution of ownership in their business.

There are cases in which pre-emption rights need not be prioritised. These cases include when shares are issued to employees in a share scheme or any shares that have been issued for non-cash payments. It is also very common for business owners to ask their shareholders not to apply their pre-emption rights, especially if they do not have many shares.

Are there any restrictions on the number of shares issued by new businesses?

In the UK, there are no legal obligations for the minimum and maximum number of shares that should be issued for a private company.

When it comes to public limited companies, things are slightly different. These companies need to have a minimum issued share capital with a minimum nominal value of  £50,000 in sterling.

Remember, shares represent a percentage of ownership in your company, and there are many cases in which issuing more shares could be better for the company and the sharing of its profits. For example, if there are only two shares, each share accounts for 50% ownership, and so on.

What does the process for issuing new shares look like?

The process of issuing and selling shares can be complicated and may look quite different depending on what type of shares you plan to sell. Differences and variations to the following process may also occur, depending on your company type, but typically follows this structure:

Determining the details of your shares

Deciding on the types of shares and how many you wish to issue is very important. You also need to decide on the proposed prices of the shares you wish to sell. This price is usually dependant on supply and demand, but you may want to speak to a financial

advisor to ensure that you aren’t selling too high or too low.

Look at any current documents and speak to current shareholders

Speak to any company directors or others who may have a say in the company’s operations, and see what they have to say about issuing out more shares from the original shareholders. They may be able to offer valuable advice but may also oppose the sale of more shares. In which case, a shareholder resolution may need to take place. Look into pre-emption rights and the Companies Act, as well as any shareholders’ agreements and articles of association. Ensure that the shares you plan to issue comply with all of these documents.

Offer shares to existing shareholders

Offer the issue of new shares to any existing shareholders first, according to pre-emption rights that you may have in place. If your current shareholders are not interested in purchasing more shares, or you are not obligated to offer new shares to them, you can begin seeking out potential investors. Choose potential investors very carefully, especially if the shares you are selling offer these shareholders a vote. Once you have spoken to a few investors, provide any interested investors with the proper application forms.

Selling the shares

Once you have received all your applications, shares will usually be allotted through a board resolution where investors will be chosen based on their applications. The next step is to allot share certificates to all new shareholders. When issuing new shares, you notify Companies House. You can do this by filling in the SH01, which is relatively straightforward. You should also attach a copy of shareholder resolutions.

Your accounts

You will need to go to your accounts and ensure that your company’s register is updated with new shareholders and share certificates once any shares have been sold. Include the new share allotments in your business’s next Confirmation Statement. Remember that shareholders will receive a percentage of your business profits.

There is a lot of paperwork and admin involved with this process, meaning that there is a lot of opportunity for mistakes to be made. As we said, different types of shares will also come with their own unique requirements, so the above processes must be looked at as a basic skeleton when selling shares. Ensure that you understand the process in detail before embarking on it, and speak to financial professionals should you feel that you need help. This is definitely not a process that you should wing.

How can I make my business look more attractive to potential investors?

It is all good and well to want to sell shares in your business to raise funds. But it can be incredibly disappointing to make this important decision only to find out that you have no potential investors interested in buying your shares.

So before you even start advertising the sale of your shares, you should make your business as attractive as possible to potential investors. Remember also only to approach investors that you would want to have a share in ownership in your business!

Have audited financials

One of the first things that potential investors want to see is an audit of your company’s financials for the past three years or more. There should be proof that the numbers that you are claiming are indeed true. No one wants to invest in a business with faulty financials, so ensure that you always keep accurate records to make the auditing princess easier and quicker.

Eliminate excess costs

Make your business appear more attractive by eliminating any unnecessary costs. Unnecessary costs mean fewer profits for shareholders, so show your potential investors that your business knows how to spend wisely.

Be transparent

Investors appreciate transparency. They want to know why you want to raise funds, what you are looking for in terms of shareholders, if you wish to redeem shares at a later stage, and if you have an exit strategy. Being upfront from the get-go will also save you issues later down the line.

Having good leadership in place

Faulty leadership is where many companies fail, and is a huge turn-off to potential investors. Ensure that you have a proper leadership structure in place and that your company has highly dependable leaders.

Have growth plans in place

Investors want to invest in businesses that are set to grow. How does your company plan to grow? Ensure that you have a detailed growth plan available for investors to read over when deciding if they want to buy shares in your business.

Selling shares in your company can seem like an easy and hard-and-fast solution to raise funds, but it is usually far more complex than that. Understanding the ins and outs of selling shares and knowing the different types of shares will help you make the best decisions for you and your business.

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