Deferred Ordinary Shares are a specialized type of equity with specific dividend conditions. This article provides a comprehensive understanding of deferred ordinary shares, their historical context, types, key events, explanations, and their significance in the financial world.
Historical Context
Deferred ordinary shares have been a part of the corporate finance landscape for decades, often issued to founder members of companies as an incentive structure. Historically, these shares provided a mechanism to reward founders with substantial profits once the company achieved financial stability and profitability.
Types/Categories of Deferred Ordinary Shares
Founder Shares
Issued to the founders of a company, these shares delay dividend payments until all other ordinary shares have received their dividends. This aligns founders’ incentives with the long-term success of the company.
Fixed-Period Deferred Shares
These shares receive little or no dividend for a predetermined number of years. After this period, they are treated equally with other ordinary shares for dividend distribution. This type incentivizes early investors to reinvest profits back into the company during its formative years.
Key Events and Detailed Explanations
Issuance Process
Deferred ordinary shares are typically issued during the initial stages of a company’s formation. These shares are documented in the company’s articles of incorporation, detailing the conditions under which dividends will be paid.
Dividend Payment Structure
- Priority Payments: Other ordinary shares receive dividends first.
- Large Profit Share: After all other shares are paid, deferred shares often entitle holders to a significant share of the remaining profit.
Example
A startup company issues 100,000 deferred ordinary shares to its founders. According to the company’s dividend policy, these shares will start receiving dividends only after three years, or once regular ordinary shareholders have been paid.
Mathematical Models and Charts
Dividend Distribution Model
The following Mermaid diagram illustrates the dividend distribution process for deferred ordinary shares:
graph TD
A[Total Company Profit] --> B[Distribute Dividends to Regular Ordinary Shares]
B --> C[Remaining Profit]
C --> D[Distribute Dividends to Deferred Ordinary Shares]
Importance and Applicability
Incentivizing Founders
Deferred ordinary shares are crucial in aligning the interests of founders with the long-term growth of the company. They ensure that founders are motivated to drive the company towards sustained profitability.
Early Investor Attraction
Fixed-period deferred shares attract early investors willing to forgo immediate returns for potentially larger future gains, fostering long-term investment in the company’s success.
Examples and Considerations
Example Scenario
A tech startup issues deferred ordinary shares to its founding team with a 5-year deferral period. The founders understand that their patience will be rewarded significantly once the company becomes profitable and grows in valuation.
Considerations
- Risk Assessment: Investors must assess the risk associated with delayed dividend payments.
- Regulatory Compliance: Companies must ensure compliance with securities regulations when issuing deferred shares.
Related Terms with Definitions
- Equity: Ownership interest in a company in the form of shares.
- Dividends: Distribution of a portion of a company’s earnings to shareholders.
- Ordinary Shares: Common stock entitling holders to dividends, which are not fixed and vary depending on the company’s profitability.
Comparisons
Deferred Ordinary Shares vs. Preferred Shares
- Deferred Ordinary Shares: Dividends paid after regular shares, often to founders, with substantial profit potential.
- Preferred Shares: Fixed dividends with priority over ordinary shares but usually no voting rights.
Interesting Facts
- In many historical contexts, deferred ordinary shares have been used as a method to reward entrepreneurial risk-taking.
- Some famous companies, including tech giants, have utilized deferred ordinary shares as part of their equity structure to balance short-term liquidity with long-term growth.
Inspirational Stories
Example Story
The co-founders of a successful fintech startup were issued deferred ordinary shares. Despite initial financial challenges, their long-term vision and patience paid off as the company grew exponentially, turning their shares into a significant financial reward.
Famous Quotes
- “The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Philip Fisher
Proverbs and Clichés
- “Good things come to those who wait.”
- “Patience is a virtue.”
Expressions, Jargon, and Slang
- Dry Powder: Reserved capital available for investment.
- Skin in the Game: When stakeholders have a personal investment or interest in the outcome.
FAQs
What are deferred ordinary shares?
How do deferred ordinary shares benefit founders?
What is the difference between deferred ordinary shares and preferred shares?
References
- “Investment Valuation” by Aswath Damodaran.
- “The Intelligent Investor” by Benjamin Graham.
- Investopedia: Deferred Shares Explanation.
- Corporate Finance textbooks and articles.
Summary
Deferred ordinary shares are a vital financial instrument in corporate finance, offering delayed dividends with significant potential profit-sharing. They align founder incentives with long-term success and attract early investors willing to reinvest profits for future gains. By understanding their structure, benefits, and risks, stakeholders can make informed decisions on using or investing in deferred ordinary shares.
