Understanding Different Types of Share Classes for Companies in Ireland

Time to read:

minutes

Who should read this?

This article is primarily written for new business owners and startup founders in Ireland who need to understand share structures.

It's particularly relevant for those incorporating a company or planning to bring on investors.

Key Takeaways:

Share classes define specific rights and obligations for shareholders, affecting everything from voting power to profit distribution, and can be established during incorporation or added later through amendments
Founders typically start with Ordinary Shares but may need additional classes like Preference Shares to attract investors while maintaining control over key business decisions
Employee incentivisation can be achieved through specialised share classes like Growth Shares or Non-Voting Shares, helping align staff interests with company success
The rules governing share classes come from the Company Constitution and shareholders' agreements, not from the names of the share types themselves
Multiple share classes offer flexibility in dividend distribution and can help protect investor interests while maintaining founder control through mechanisms like enhanced voting rights
Legal consultation is essential when setting up share classes to ensure compliance with the Companies Act 2014 and to create a structure that can adapt to future business growth
Careful consideration of investor expectations is crucial, particularly regarding preference shares and anti-dilution protections

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Starting a business is a huge undertaking, and for many new business owners in Ireland, understanding the structure of your company’s shares can seem daunting.

One of the first decisions you’ll need to make when setting up your company is determining the type and class of shares to issue.

Share classes define the rights, privileges, and restrictions of shareholders, and choosing the right ones can influence everything from control over the business to profit distribution.

This guide will help demystify share classes and explain why establishing multiple share classes might be necessary for your company.

1. What Are Share Classes?

A share class refers to a category of shares that carries specific rights and obligations for its holders.

When setting up a new company in Ireland, you typically define these share classes in your company’s Constitution. Share classes are a way to differentiate between various types of shareholders, especially when you want to tailor rights to suit the needs of different investors or founders.

The first time you’ll have to consider share classes is when you are filling out the CRO’s incorporation form (unless you incorporate with Open Forest and you won’t have to worry about this). The CRO will ask you what you would like to name your share class and what types of share classes there should be.

Generally speaking, founders will choose one share class and call that class “Ordinary Shares”.

2. How Are Share Classes Established?

In Ireland, when incorporating a private limited company, you initially decide on your share structure during incorporation.

If you wish to create multiple share classes later, you can amend the Constitution of the company (think of this as the company’s bible) through a special resolution of the shareholders. This flexibility allows you to introduce new share classes as your business evolves, whether to bring on investors or to separate voting rights.

To establish share classes, you should to include details on:

Voting rights - does the share class allow holders to vote on company matters?
Dividend rights - does this class receive dividends before others?
Capital rights - how are these shares treated if the company is sold or wound up?
Conversion rights - can these shares be converted into another class, e.g., ordinary shares?

These distinctions are important, as they help founders manage control over the company and structure investment deals.

If you plan to give out EIIS compliant shares, you now cannot attached are "preferential rights" to those shares, so no dividends, no preference to those investors upon sale etc.

3. Why Would a Company Need More Than One Share Class?

Multiple share classes are usually set up for the following reasons:

Retaining Founder Control - founders often want to maintain control over their business even when they seek external funding. Creating a separate class with enhanced voting rights (e.g., Class A shares) allows them to make key business decisions without interference.
Attracting Investors - investors may require special rights to protect their investment. Issuing preference shares gives them priority in receiving dividends and capital if the company is liquidated.
Employee Incentives - a common strategy for startups is to issue non-voting shares or restricted shares to employees as part of an incentive plan. This allows employees to share in the company’s success without diluting founder control.
Flexible Dividend Policies - multiple share classes allow companies to distribute dividends selectively. For instance, you may wish to reward certain shareholders with higher dividend payouts without setting a precedent for all.

4. Common Share Classes in Irish Companies

Below are some of the most common share classes you might encounter:

Ordinary Shares

Ordinary shares are the most straightforward type of share, typically issued to founders. They usually have full voting rights and entitle the holder to dividends when the company decides to distribute profits. In a liquidation, ordinary shareholders are often paid after creditors and preference shareholders.

Preference Shares

Preference shares are often used to attract investors. They have priority over ordinary shares when it comes to dividends and capital repayment. However, preference shareholders typically have limited or no voting rights. Startups often issue these shares to angel investors or venture capitalists as part of a funding round.

Non-Voting Shares

As the name suggests, non-voting shares do not carry voting rights but may have dividend rights similar to ordinary shares. These are ideal for employees or family members who are not involved in management but still want a stake in the company.

Redeemable Shares

Redeemable shares can be bought back by the company at a future date. This feature is appealing for investors who want a clear exit strategy or for companies looking to reward shareholders without diluting equity permanently.

Founder Shares

Founder shares can be one and the same as Ordinary Shares but often have enhanced voting rights (e.g., 10 votes per share) and might not be entitled to dividends until certain performance metrics are met. This type of share is useful if founders want to ensure they maintain decision-making control even as more shares are issued

Growth Shares

Growth shares are designed to reward shareholders only if the company achieves a specific growth target. These shares usually have no immediate value and gain value only when the business exceeds a set performance threshold.

They are commonly used to incentivise key employees, aligning their interests with the company’s long-term success while minimising initial equity dilution for existing shareholders. Growth shares are often included in employee share schemes to encourage contribution to future growth.

Keep in mind

What is important to note about the above share types, is that the rules do not come from the name of them, but instead, come from the precise rules that are written describing the share classes in the Company Constitution and/or a shareholders agreement / employee option plan etc.

5. Setting Up Share Classes: Practical Considerations

Consult Legal Advice - setting up different share classes can be complex, especially if you plan to introduce multiple types with specific rights. You need to ensure compliance with the Companies Act 2014. Talk to Open Forest and we will guide you.
Plan for the Future - choose a structure that can adapt as your business grows. For instance, you might initially only need ordinary shares but should leave room in your Constitution to issue preference shares later.
Investor Expectations - make sure that your share classes align with investor expectations. Angel investors and venture capitalists may have specific requirements around preference shares, liquidation rights, and anti-dilution protections.

6. Final Thoughts

Creating the right share class structure is important for managing control, attracting investment, and rewarding shareholders in a new business.

As a founder, taking the time to understand these distinctions will help you build a solid foundation for your company’s growth. If you’re unsure where to start, just reach out to us and we can set up a FREE call or a legal health check on your company.

How Can Open Forest Help?

‍Open Forest offers the cheapest and fastest incorporation packages in Ireland including holding companies for €99 including CRO fees, VAT and access to the Open Forest platform so you can keep track of all of your legal, tax and accounting obligations - at no additional cost.

Choose from one of our incorporation packages here and we will take care of the rest.

Frequently Asked Questions (FAQs)

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What are the most common types of share classes in Irish companies?

Common share classes include Ordinary Shares (standard voting and dividend rights), Preference Shares (priority dividend rights), Non-Voting Shares, Redeemable Shares, Founder Shares, and Growth Shares.

When should a company consider creating multiple share classes?

Companies should consider multiple share classes when they want to retain founder control while seeking external funding, create employee incentive schemes, implement flexible dividend policies, or attract investors with specific rights requirements.

How are share classes established in Ireland?

Share classes are initially established during company incorporation through the CRO form and company Constitution. Additional classes can be added later by amending the Constitution through a special resolution of shareholders.

What key rights need to be defined when setting up share classes?

When establishing share classes, companies must define voting rights, dividend rights, capital rights (treatment during sale or liquidation), and any conversion rights between share classes.

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