Attributes stack
Ordinary, preferred, voting, restricted, redeemable, none of these are exclusive; one slice can carry several rule cards at once.
Volume 03, Chapter 4
Types of Equity: Ordinary, Preferred, Founder, Restricted, Redeemable Shares
Percentage says how much you own. Class says what that ownership can actually do, votes, priority, restrictions, redeemability, and every rule card can be mixed and stacked.
The Golden Rule
A percentage is half a sentence. The class attached to it is the other half, and it's the half most disputes are hiding in.
Use this chapter as a reference: match the rule card, votes, payout priority, restrictions, redeemability, to what each holder in your business actually needs, then write it into the constitutional documents before the money moves.
Voting powerWho steers, one vote per share, or none at all.
Payout priorityWho gets paid first if the company is sold or wound up.
RestrictionsLock-ins, buy-backs, and vesting that limit when a slice can move.
Percentage isn't power
"20% of the company" is unfinished until you name the class attached to it.
Vesting is earned
Ownership that arrives gradually protects both sides from a co-founder who leaves in month six.
Unwritten means default
A rule card that only exists in conversation doesn't exist, the law's defaults apply instead.
1
Definition
Imagine two people who both say "I own 20% of the company." One of them can vote on every major decision. The other cannot vote on anything, ever. Both sentences are true. Only one of those owners has any say in what happens next.
That difference has nothing to do with the size of the slice. It comes from the class attached to it. A share class is a category of shares with its own rule card: what it can vote on, what dividends it earns, when it gets paid, and whether it can be taken back. A company can create several classes and decide exactly what each one may and may not do.
In One Sentence
Not all slices of the pizza come with the same rights. "Ordinary vs preferred" (Chapter 3, Section 6) is only the start, shares can also be voting or non-voting, restricted, redeemable (buy-back-able), reserved for founders or employees, or held by the company itself. These attributes combine: Mr B's stake in MANIAC MINDZ is ordinary AND non-voting, one slice, two rule cards. The classes and their rules live in the company's constitutional documents, its official founding rules (Chapter 12), not in anyone's memory.
2
The Rule Card Explanation
Go back to the pizza from Chapter 3.
Now imagine every slice comes with a small rule card clipped to it:
- This slice votes. / This slice watches quietly.
- This slice is paid first if the pizza is sold. / This slice is paid last.
- This slice can be bought back by the kitchen. / This slice is yours forever.
- This slice only fully belongs to you after four years.
Same pizza. Same sizes. Different powers. That's what share classes are: the size of the slice says how much you own; the rule card says what your ownership can do.
Memory Trick
Percentage = how much. Class = what it can do. Never discuss one without the other, "20% of the company" is half a sentence until you hear which class.
3
The Nine Types at a Glance
Ordinary
Standard bundle: vote, dividends when declared, paid last, unlimited upside.
The default slicePreferred
Paid before ordinary (dividends and/or on sale); often less voting power.
Paid firstVoting
Carries votes, usually one per share.
SteersNon-Voting
Full financial rights, zero say in decisions.
Funds onlyFounder
Ordinary shares with extras: sometimes stronger voting, vesting, transfer limits.
Builder's sliceRestricted
Rights limited by conditions: lock-ins, first-refusal, leaver clauses.
Seatbelt onRedeemable
Company (or founder) holds a buy-back right at an agreed price or formula.
TemporaryEmployee
Small stakes for staff, almost always vesting over years.
Earned, not givenTreasury
Bought-back shares held by the company itself, no votes, no dividends.
Parked| Type | One-Line Rule Card | Typical Holder |
|---|---|---|
| Ordinary shares | Standard bundle: vote, dividends when declared, paid last, unlimited upside | Founders, long-term believers |
| Preferred shares | Paid before ordinary (dividends and/or on sale); often less voting power | Formal investors wanting safety |
| Voting shares | Carries votes, usually one per share | Whoever should steer decisions |
| Non-voting shares | Full financial rights, zero say in decisions | Investors who fund but don't manage, like Mr B |
| Founder shares | Ordinary shares with founder extras: sometimes stronger voting, vesting, transfer limits | Founders, protects the person who built it |
| Restricted shares | Rights limited by conditions: can't sell before a date, can't sell without offering others first | Anyone the company wants committed, not passing through |
| Redeemable shares | Company (or founder) has the right to buy them back at an agreed price/formula | Temporary investors, money in, money out, ownership returns |
| Employee shares | Small stakes for staff, usually vesting over years, earned by staying | Key employees you want thinking like owners |
| Treasury shares | Shares the company bought back and now holds itself, no votes, no dividends, "parked" | The company itself, after a buy-back |
4
Each Type, Properly Explained
4.1 Ordinary Shares, the default slice
The plain pizza slice: one vote per share, dividends only when declared, last in the payout queue, no ceiling on upside. Every company has at least one class of these. Mr A's 800 shares are ordinary voting shares, he carries the risk, so he holds the steering wheel.
4.2 Preferred Shares, the paid-first slice
Trades upside or votes for safety: a fixed or priority dividend, and a place ahead of ordinary shares (but still behind every creditor) if the company is sold or wound up. Common in formal deals, Nimbus Labs' professional investor holds these (Chapter 3, Section 9).
4.3 Voting vs Non-Voting Shares, the steering wheel switch
Any class can be issued with or without votes. Non-voting shares are the founder-friendliest way to take money: the investor gets the full financial ride, value growth, dividends, while daily and strategic control stays put. This is exactly Mr B's deal: 20% of the value, 0% of the steering. What votes actually control is Chapter 13's whole subject.
4.4 Founder Shares, the builder's slice
Ordinary shares with extra rules added to protect the person who built the business: sometimes stronger voting, often vesting (see 4.8) when there are co-founders, and transfer restrictions so a founder can't quietly sell control to a stranger. The point isn't privilege, it's making sure the person who built the business can't suddenly leave with it, or quietly hand control to a stranger without the other owners agreeing.
4.5 Restricted Shares, the slice with a seatbelt
Ordinary rights, but with conditions written on the rule card: cannot be sold before year X (a lock-in), must be offered to existing shareholders first (a right of first refusal), lost if you leave within two years. Restrictions turn "I own it, I do what I want" into "I own it, within the rules we all signed."
4.6 Redeemable Shares, the returnable slice
The company (or founder) holds a buy-back right: at an agreed time or trigger, it can repurchase the shares at an agreed price or formula. This is the "temporary investor" structure from the funding menu, excellent when a founder wants money to grow now and full ownership back later. The mechanics, triggers, pricing, payment windows, are Chapter 14.
4.7 Employee Shares, the loyalty slice
Small ownership stakes granted to key staff so they gain when the business gains. Nearly always paired with vesting and with restrictions (non-voting, must sell back on leaving). Done well, your best cutter starts caring about fabric waste like an owner. Done carelessly, an ex-employee owns a piece of your company forever, see the mistakes below.
4.8 A Word on Vesting, ownership you earn over time
Vesting means shares belong to someone only gradually: e.g., 25% after each full year, over four years. Leave after 18 months, keep only what vested. It protects everyone from the co-founder or employee who leaves in month six yet keeps a full slice forever.
4.9 Treasury Shares, the parked slice
When the company buys back its own shares (a redemption, or a buy-back), those shares can sit "in the treasury": owned by the company itself, carrying no votes and earning no dividends, parked, and available to reissue later (to a new investor or an employee plan) without creating brand-new shares.
5
Attributes Combine: Reading a Real Rule Card
Classes aren't a menu where you pick one, they're attributes you stack. MANIAC MINDZ's actual cap table, with rule cards spelled out:
| Holder | Shares | Class, in plain words |
|---|---|---|
| Mr A | 800 (80%) | Ordinary · voting · founder transfer-restrictions |
| Mr B | 200 (20%) | Ordinary · non-voting · 5-year lock-in · founder holds a buy-back option |
One company, one pizza, two rule cards, and every word of both cards exists in writing, in the shareholders' agreement (Chapter 12) and the company's articles (its official rulebook). A class that exists only in conversation doesn't exist.
Across industries, matching the class to the money:
MANIAC MINDZ
InvestorTrusted personal investor, Mr B.
WantsFunds in, zero interference.
Class chosenOrdinary non-voting with a 5-year lock-in.
City Kitchen
InvestorFamily investor, funding a second branch.
WantsA real say in decisions.
Class chosenOrdinary voting, limited by reserved matters.
Nimbus Labs
InvestorProfessional fund.
WantsSafety and priority, not day-to-day control.
Class chosenPreferred, with priority on sale.
Precision Print & Press
InvestorColleague financing a buyout.
WantsMoney back, then ownership gone.
Class chosenRedeemable shares, repurchased over five years.
Same law, four different rule cards, each shaped by who the money is and what both sides need.
6
Common Mistakes
Common Mistake #1: Promising "Shares" Without Naming the Class
"I'll give you 15%" is not a deal, 15% of what powers? Voting or not? Preferred or ordinary? Redeemable or forever? Every dispute hiding in that sentence is cheaper to settle before the money moves.
Common Mistake #2: Employee Shares Without Vesting or Buy-Back Terms
An employee given 5% outright quits after a year, and is now a permanent 5% owner you must consult (or buy out at their price) forever. Vesting + a leaver buy-back clause prevent the whole category of problem.
Common Mistake #3: Inventing Complex Classes Too Early
A three-person business with five share classes has far more complexity than it needs. Start with ordinary shares; add classes only when a real deal needs a real rule card.
Common Mistake #4: Rule Cards That Exist Only Verbally
"We agreed his shares were non-voting", where? If the class rules aren't in the signed documents, the law's defaults apply, and defaults usually mean votes.
7
Frequently Asked Questions
Q: Can one company really mix several of these at once? A: Yes, that's normal. A typical small-business setup: founders hold ordinary voting shares; an investor holds ordinary non-voting (or preferred) shares; a key employee holds a small vesting stake; and the articles authorize redeemable shares for future use.
Q: Do non-voting shareholders have no rights at all? A: They keep full financial rights (dividends, value growth, their place in the payout queue) and legal protections against being cheated, they just don't steer. Many agreements also give them consent rights on a short list of extreme decisions (reserved matters, Chapter 13).
Q: Which class should a first-time founder offer a first-time investor? A: The boring answer is usually right: ordinary non-voting shares with a lock-in and a buy-back option, simple to explain, cheap to document, keeps control clear. Compare alternatives in Chapter 8.
Q: Who decides what classes exist? A: The owners, through the company's constitutional documents, created at registration or added later by proper resolution (Chapter 12). Class rules are written law inside your company.
8
Quiz Yourself
Quiz 1
"Percentage says how much; class says ___."
What your ownership can do, its powers: voting, dividends, priority, restrictions, redeemability.
Quiz 2
An investor wants the financial upside but you want zero interference in decisions. Which attribute solves this?
Non-voting shares (as with Mr B's 20%).
Quiz 3
Your co-founder gets 30%, vesting over 4 years, and leaves after 2. What do they keep?
The vested half, 15%. The unvested half returns.
Quiz 4
After a buy-back, where can the repurchased shares sit, and what powers do they have there?
In the treasury, held by the company itself, no votes, no dividends, available to reissue later.
Quiz 5
True or False: preferred shareholders are paid before the company's creditors if it fails.
False, before ordinary shareholders, but always after every creditor. See Chapter 6's payout queue.
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Practice Exercise
Write the rule card for every shareholder your business has (or plans):
- List each current or intended holder, founder(s), investor(s), any employee.
- For each, stack the attributes: ordinary/preferred · voting/non-voting · restrictions (lock-in? right of first refusal?) · redeemable? · vesting?
- Beside each attribute, write why, one clause per line ("non-voting: investor funds, founder steers").
- Check the stack against your cap table, then carry the cards into the shareholders' agreement conversation in Chapter 12.
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Quick Summary
Quick Summary
- A share class is a rule card: votes, dividends, payout priority, restrictions, redeemability.
- The nine working types: ordinary, preferred, voting, non-voting, founder, restricted, redeemable, employee, treasury, and attributes stack (Mr B: ordinary + non-voting + lock-in + buy-back).
- Vesting makes ownership earned over time, essential for co-founders and employee shares.
- Start simple (ordinary shares); add classes only when a real deal needs one.
- A class not written into the signed documents doesn't exist, defaults will apply instead.
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