Reservation of ordinary shares: Overview, definition, and example
What is reservation of ordinary shares?
Reservation of ordinary shares refers to the process where a company sets aside a certain number of shares that are available for future issuance to shareholders, employees, or other parties. These shares are typically "reserved" to be issued under specific conditions, such as in the case of employee stock options, shareholder agreements, or financing needs. Ordinary shares (also called common shares) represent ownership in a company and entitle shareholders to voting rights and dividends.
For example, a company might reserve a portion of its ordinary shares to offer to employees as part of a stock option plan or to sell to investors in a future financing round.
Why is reservation of ordinary shares important?
The reservation of ordinary shares is important because it helps a company manage its equity structure and plan for future capital needs. By setting aside shares in advance, the company can ensure that it has enough shares available to meet the demands of investors, employees, or other stakeholders without needing to issue new shares and dilute existing shareholders' ownership.
For SMBs, reserving ordinary shares can be useful when planning for employee incentives, raising capital, or addressing future business expansion needs. It provides flexibility while maintaining control over the company’s ownership structure.
Understanding reservation of ordinary shares through an example
Imagine your small business is looking to raise capital from investors in the future. To prepare for this, you may reserve 20% of your company’s total ordinary shares, ensuring that you have shares available for future investors without needing to issue new shares that could significantly dilute the ownership of current shareholders.
In another example, your business may decide to offer stock options to key employees as part of their compensation package. You reserve a portion of ordinary shares to ensure you have enough available to meet the terms of the stock option plan when employees decide to exercise their options.
An example of reservation of ordinary shares in action
Here’s how reservation of ordinary shares might be referenced in a company’s articles of incorporation or shareholder agreement:
“The company shall reserve 10% of its authorized ordinary shares for future issuance under the company’s employee stock option plan. These shares shall be available for issuance at the discretion of the board of directors.”
Conclusion
Reservation of ordinary shares allows a company to set aside a portion of its shares for future use, such as for employee compensation, investment purposes, or other strategic needs. For SMBs, reserving ordinary shares provides flexibility in managing ownership and raising capital while minimizing the risk of diluting existing shareholders. Properly managing share reservations helps ensure the company can meet future demands without unnecessary complications.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.