The Legal Nature of a Share in a Startup
Structuring a startup's capital begins with the concept of the share. Article 29 of the Georgian Law on Entrepreneurs defines it: a share is a right implying a person's participation in the capital of an entrepreneurial society, with which rights and obligations are connected. A share is an object of ownership — which means that the portfolio of shares created by the founders is recorded like other objects of ownership and is subject to the general rules of disposal, albeit with corporate peculiarities.
The disposal of shares is regulated by Article 30: a partner has the right freely to dispose of their own share in the entrepreneurial society, unless restrictions are established by legislation, the statute or an agreement of the partners; a prohibition on the transfer of a share is impermissible. If a share is in the co-ownership of several persons, they are considered co-partners; where co-partners or heirs cannot agree by a majority of votes on the management of the share, the court appoints a manager of the share. The founders' agreement is precisely the instrument by which the boundaries and priorities of free disposal are set in advance.
Classes of Shares in a Limited Liability Company
Dividing a startup's capital often requires introducing different classes. Article 135 regulates the classes of shares of a limited liability company: the statute may allow the existence of different classes of shares; shares producing identical rights and obligations form one class, and the nominal value of all shares of one class must be the same. The rights and obligations connected with shares of different classes are regulated by the statute.
The protective rule is particularly important: a decision concerning a change of a right connected with any class of shares additionally requires the consent of holders of at least 3/4 of the total number of votes connected with the placed shares of the respective class, unless otherwise provided by the relevant part of the statute adopted by the partners unanimously. Structural changes caused by an investor's entry or the exercise of options thus run into the class-protection mechanism, and this must be taken into account in advance.
Classes of Shares in a Joint-Stock Company
When a startup operates as a joint-stock company, Article 158 provides that a share may be ordinary or preferred. An ordinary share secures 1 vote at the general meeting; a preferred share does not secure a vote, except in cases provided by law or the statute, and the number of preferred shares must not exceed half of the number of placed shares. A preferred share grants its holder the preference defined in the statute regarding the dividend rate and the order of receipt, and the same preference operates in the distribution of the property of a dissolved society.
The number of shares of any class, the rights and obligations connected with them and the conditions for changing those rights must be reflected in the statute before the placement of shares of that class; after placement, a change of rights is permissible only with the consent of 3/4 of the holders of the shares of the respective class. A company may also issue other securities convertible into shares — an instrument that links an obligation to participation in the capital.
Practical Stages of Structuring
In practice, capital structuring consists of several steps. The first is the choice of the company form: a limited liability company fixes classes of shares in its statute, while a joint-stock company uses ordinary and preferred shares. The second is the design of the classes: the rights of founders, investors and option holders are not identical, and creating a separate class for each group is the legitimate expression of precisely these differences. The third is taking the protective rules into account: changing a class right requires the consent of 3/4, so the scenarios of future changes must be calculated in advance. The fourth is the fixation of documents: the statute and the partners' agreement together create the frame within which even negotiations already proceed in legal form.
Frequently Asked Questions
May the disposal of a share be restricted?
By the statute or an agreement of the partners — yes; a complete prohibition on the transfer of a share is impermissible, so the wording of any restriction must be chosen carefully.
What is the difference between ordinary and preferred shares?
An ordinary share gives a vote at the meeting; a preferred one gives preference in dividends and distribution but, as a rule, no vote, and its number cannot exceed half of the placed shares.
What consent is needed to change a class's rights?
The consent of holders of at least 3/4 of the votes of the respective class, unless the statute provides otherwise.
May shares of one class have different nominal values?
No — the nominal value of all shares of one class must be the same.
When must class conditions enter the statute?
Before the placement of that class of shares; subsequent changes require the consent of 3/4 of the holders.
How We Help on Legal.ge
The lawyers of Legal.ge assist startups at every stage of equity structuring: designing classes of shares, balancing the rights of founders and investors, drafting statutes and agreements, and leaving room for future funding rounds. Contact us on Legal.ge — we will help make your startup's capital structure legally sound and ready for growth.