Deferred Ordinary Share Overview
Deferred ordinary shares are a unique classification of ordinary shares. Usually, this type comprises founder shares or shares provided to significant stakeholders within a company. Dividends for these shares are either paid only after all other ordinary shares have received their dividends, or they may receive little to no dividends for a predetermined number of years, after which they start to rank along with other ordinary shares for dividend payments.
Examples
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Founder Shares: In many startups, founders receive deferred ordinary shares as a sign of their initial investment and role in forming the company. These shares may become valuable in the long-term as the company grows and begins paying larger dividends after other shareholders have been paid.
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Profit Sharing: Some established companies may issue deferred ordinary shares to executive members. These shares only yield dividend payments post the distribution to regular shareholders but entitle executives to larger future profits as an incentive for their continued efforts.
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Staggered Dividend Payments: A corporation seeks to reward long-term investment by issuing shares that receive no dividends in the first few years but, starting year five, these shares align with other ordinary shares in dividend distribution.
Frequently Asked Questions
What distinguishes deferred ordinary shares from regular ordinary shares?
Deferred ordinary shares differ in that they receive dividends only after other ordinary shares have been paid or after a fixed number of years, making them potentially more beneficial as the company grows and profits increase.
Why might a company issue deferred ordinary shares?
Companies may issue deferred ordinary shares to incentivize long-term commitment from founders or key stakeholders. It allows for initial capital preservation and rewards stakeholders when the company becomes profitable.
Can deferred ordinary shares be converted into regular ordinary shares?
In some cases, deferred ordinary shares can be converted into regular ordinary shares upon meeting certain predefined conditions or after a set period.
Who generally holds deferred ordinary shares?
Deferred ordinary shares are typically held by founder members, company executives, or key stakeholders who are expected to contribute significantly to the company’s growth.
Are there any risks associated with deferred ordinary shares?
Yes, the primary risk is the initial lack of dividends which may extend for multiple years, contingent upon the company’s profitability and dividend policies.
Related Terms and Definitions
- Ordinary Shares: Stocks that represent residual ownership in a company and entitle holders to dividends if available. Ordinary shareholders usually have voting rights in company affairs.
- Preferred Shares: A class of ownership in a corporation with a fixed dividend amount and priority over ordinary shares in dividend distribution and assets during liquidation.
- Dividend: A portion of a company’s earnings distributed to shareholders, typically out of profits or reserves.
Online Resources
Suggested Books for Further Studies
- “Financial Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso
- “Accounting for Dummies” by John A. Tracy
- “International Financial Reporting and Analysis” by David Alexander and Anne Britton
Accounting Basics: “Deferred Ordinary Share” Fundamentals Quiz
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