Last updated: 30 April 2024
When people think of shares, they usually think of ordinary shares, otherwise known as 'common shares'. But there's more than one way to share equity.
Ordinary shares grant shareholders rights to capital, dividends and vote. And incur tax on award.
It’s pretty standard for business owners to distribute equity this way. A survey we conducted found that most firms opt for ordinary shares.
The thing is, ordinary shares are just that - ordinary. And sometimes, problematic.
Ordinary shares are issued without any strings attached, which is risky. What if they don’t deliver as promised?
Don’t be ordinary, be different.
Not everyone knows this, but other types of shares offer greater control and flexibility as those shares can be conditional.
Unlike ordinary shares, conditional shares are exactly that - conditional.
In other words, conditions must be met before all or some of the equity is released, such as KPIs and other performance-based milestones or time-related conditions.
That way, everyone knows where they stand and what must be achieved in order to earn their slice of the action. And you can rest assured knowing that you’re not giving away precious equity for little return.
Conditional shares are perfect for fast-growing, ever-evolving startups and scaleups in need of flexibility. And for building early, effective relationships with co-founders, pivotal hires, and aligning teams.
Effectively, all share types can be conditional except for ordinary shares. It's just a word to describe shares (or share options) issued under certain conditions.
...can all be conditional. It really comes down to how the scheme is designed and what's in the share/option agreements.
With a conditional scheme, conditions must be met before the recipient’s shares become unconditional. Until that point, they’re limited as to what they can do with them.
When they become unconditional, they’ll have the opportunity to exercise their options (that is convert them into shares to buy or sell) or cash in their shares. In some cases, they may at that point be eligible to receive dividends.
We tend to break vesting conditions down into two categories: time and performance-based. Most conditions are generally time-related and outlined in a vesting schedule.
Whereas a performance goal could be the completion of a project or generating ‘X’ amount in sales or bringing in new business. You can stipulate numerous and a mix of generic and performance-based conditions.
The crucial thing to remember is whatever conditions are put in place must be clearly defined, measurable and tangible - clarity is key. Check out our guide exploring best practices.
For a comprehensive list of conditions to consider when designing your scheme, download our free Conditional Equity Milestones guide.
In short, conditional shares help to eliminate risk by setting out clear milestones to meet before equity is unlocked. So before you issue ordinary shares (the ordinary way), consider conditional shares.
Arrange a free, no-obligation consultation with one of our equity specialists and see how Vestd makes designing conditional share schemes a breeze.