TYPES OF SHARES/SECURITIES FOR PRIVATE LIMITED COMPANIES

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The value of a company is divided by its shares, which can be of many types beyond the one most commonly discussed i.e. equity. So even though when you own any type of share, you own a piece of the private limited company, as we will discover i, the rights that come with a particular share can differ greatly. So let’s examine the different types:

Equity Shares:

The most common type of share, all equity is treated equally. So if you own equity in a company, your shares have all the voting and other rights inherent in them.

Preference Shares:

These are, as stated, preferential in nature. The advantage to holding a preferential share is that, in case of liquidation of the company, the preferential shareholders will be paid out first, once all debts of the company are settled. Only once this is done will common stockholders be paid out. These shareholders are also often paid out dividends separately from equity shareholders. However, preference shares don’t have voting rights.

Equity Shares with Differential Voting Rights:

Such shares are usually issued to founders or CEOs, so that they may have a greater control over day-to-day affairs of the company. Google and Facebook are two companies known to issue such shares, which give higher voting rights to certain classes of investors. However, in India, to issue such shares, you must show that you are capable of distributing dividends for three years.

Sweat Equity

Only capable of being issued a year into an employee’s association, sweat equity is given to deserving employees at no cost. This means that the employee need not pay for the shares at all. The shares are merely allotted. Such shares cannot be allotted to people who already own shares. A valuation of the company should compulsorily be conducted before they are allotted.

ESOPs

All entrepreneurs have at least one common problem: how to motivate employees in a way that’s mutually beneficial. The most practical solution to this is the employee stock options plan (ESOP), used by small and large businesses alike. It not only keeps deserving employees motivated to grow your company, rather than just fulfill their duties, it ensures that you don’t lose them for a number of years. In an ESOP, companies provide their employees with stock ownership, often at no up-front cost, but in lieu of work performed. Shares are allocated to employees, but may vest only after a pre-defined period. It cannot be given to freelancers, promoters, consultants, etc

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