Starting your own company is a never-ending learning journey, and you’ll need to know a lot of information before you launch. If you plan to seek investment from angel investors or venture capitalists, your company must have shares to issue.
In addition, you and whomever else is starting the company will also have to purchase shares. Every share will have a nominal value which is the minimum amount a person must pay for the share. In this article, we set out how to calculate the nominal value of your shares and answer some of the most common frequently asked questions.
What does nominal value of shares mean?
The nominal value of a share is the sum a person has paid or agreed to pay to become a company member (shareholder). It reflects the value of a person's legal liability if the company faced a winding-up order or fell into insolvency through other routes, such as voluntary administration.
This is vital for the economy as entrepreneurs and investors can invest in fledgling companies without fearing losing their homes or personal money if the business becomes insolvent.
How do you calculate the nominal value of shares?
The nominal value of a share is typically £1. This has no relevance or bearing on the market value of a company’s shares which generally are much higher. Section 542(1) of the Companies Act 2006 provides that each share in a limited company with a share capital must have a fixed nominal value. A company’s value is based on the market value of its shares as opposed to the nominal value.
Can a company sell shares for less than their nominal value?
No, if the nominal value of a share is £1, you can’t sell it for 99p. It’s not legally possible for a company to ‘give away’ shares. However, the purchaser doesn’t have to pay the entire £1 at the time of purchase, and they can pay 10p at the time of purchase on the understanding that the company can call in the debt of 90p at any time.
What is share premium?
The difference between the nominal value of a share and its market value is known as the premium. A share will be issued at a premium if it’s issued at a price greater than its nominal value.
In most cases, shares will be sold at their market value as directors have a duty under the Companies Act 2006 to act in the company's best interests. Therefore, if the nominal value of a share is £1 and the market value is £5, the directors would need to provide a good reason for not selling at the higher price.
Can the nominal value of shares change?
Yes, however, increasing the nominal value of your organisation’s shares means that the personal liability of company members will also increase. Therefore, seeking professional advice before tinkering with the nominal share value is best.
What is the aggregate nominal value of shares?
The Companies Act 2006 (as amended by the Small Business. Enterprise and Employment Act 2015), sets out what must be included in a Statement of Capital. This provides a snapshot of a limited company’s share capital at a given time.
A Statement of Capital must be prepared and filed with the Registrar of Companies in a range of circumstances, including on formation of a company, following an alteration to its share capital, when any of its shares are cancelled, and when making a confirmation statement (unless the share capital hasn’t changed since the previous confirmation statement was submitted).
The aggregate nominal value of your business’s shares and the number of shares must be disclosed to Companies House as part of this statement.
How to work out the aggregate nominal value of shares?
To calculate the aggregate nominal value of the company’s shares, you need to multiply the number of issued shares by the nominal value of each share. If there are multiple share classes, then each class has to be calculated with the figures subsequently added together.
For example, company A has three share types:
- 15 Preferential – nominal value £2 each
- 70 Ordinary – nominal value £1 each
- 15 Redeemable – nominal value £0.50
Adding the nominal values of the shares together provides an aggregate nominal value of £107.50.
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Understanding the nominal value of shares is crucial for entrepreneurs and investors who are starting a company. It's an important concept that can greatly impact decision-making in the business world.
At LawBite, we have years of experience helping startups and small businesses achieve their commercial goals. We're here to support you in navigating the complexities of shares and investments, providing you with the knowledge and assistance you need to succeed. To find out howe we can help you, book a free 15 minute consultation with one of our expert commercial lawyers or give us a call at 020 3808 8314.