In a nutshell, raising money through preference shares refers to a class of ownership in a company that offers a higher claim to the company’s assets and earnings than ordinary shares (common stock).
Holders of preferred shares are paid dividends before ordinary shareholders, often at a fixed rate. This is contrary to dividends for ordinary shareholders. These the company declares depending on its financial performance that year. However, preference shares usually carry no voting rights.
If a company goes into liquidation, the holders of preference shares have a prior claim to the company’s assets over ordinary shareholders. However, their claim still comes after that of creditors.
Notably, investment by preference shares is highly sophisticated. If you are not familiar with how preference shares work or how this investment agreement operates, you may want to contact our team for advice.
How to do it
Step 1: Create a Preference Shares Investment Term Sheet
A Preference Shares Investment Term Sheet is a record of discussions between the founders of a business and an investor for potential investment by preference shares. This term sheet is not legally binding, except for confidentiality and exclusivity obligations (if applicable). Preference Shares Investment Term Sheet also sets out the parties’ preliminary thoughts on certain provisions. These will be in the Shareholders’ Agreement. This will execute at the completion of the investment and will protect the company’s or the shareholder’s interests.