December 1, 2020

SB-Accounting

Accounting + Finance Blog

Deferred (founders) shares: meaning and key explanations

deferred (founders) shares: meaning and key explanations
2Shares

Shares or stocks are certificates given by a company to show proof that an investor is a part-owner of a business. So far, we have discussed two types of shares: ordinary shares and preference shares. This article focuses on deferred shares.

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What are deferred shares?

Let’s define it in two ways

Definition in terms of dividend:

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Deferred shares are shares that give the holders the right to dividend after every other type of shares have been paid.

Definition in terms of liquidation or bankruptcy:

This type of shares is entitled to the remaining assets of the company only after holders of ordinary shares have been paid in full.

Key Explanations

The holders of this type of shares received dividends after another type of shares have received theirs.

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Normally, holders of preference shares are the first set of shares to the received dividend. This is followed by ordinary shares.

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Also, remember that preference shares received a fixed dividend. But ordinary shares received a variable dividend. In the same vein, deferred shares received a variable dividend.

During liquidation, deferred shares are entitled to receive the part of the assets of the company only after ordinary shares have been fully paid.

When a corporate entity liquidates or filed for bankruptcy, the assets (except cash) of the business will be sold. The proceeds from the disposal of the assets will be used to pay creditors, debenture holders, preference shareholders, ordinary shares and then deferred shares.

If after paying ordinary shares and the remaining assets cannot pay deferred shares in full, then the holders will be paid on a pro-rata basis. That is, they will be paid based on the number of shares each of them hold.

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A holder with more shares will be paid more, while holders with small shares will be paid little.

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Deferred shares are also called founders shares. This is so as the shares are only given to the promoters of the corporation. The founders and co-founder of the entity are entitled to this type of shares.

Moreso, the CEO and venture capital firms who help the company until it is listed in a stock market are also compensated through deferred shares.

Therefore, holders of deferred shares may also be one of the holders of ordinary shares.

Finally, deferred or founders shares are shares for special people in a company. The holders are paid a dividend or part of the assets only after ordinary shares are paid.

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