Stock split

Author:

Lucy Hoyle

|

Read time:

3 minutes

Published date:

20 October 2024

Before issuing equity to employees, some companies split existing stock to create a more flexible and scalable incentive pool. This article explains how a stock split works and the potential impact on current and future shareholders.

What is a share split?

A share split (also known as a stock split) is the process of subdividing company shares to create more shares with a lower nominal value per share. This allows a company to increase its number of shares outstanding (i.e. available for granting to employees or other contributors) without changing the total value of existing shareholders’ equity.

Why do a share split?

A common obstacle that startups face when setting up an employee equity pool is not having enough outstanding shares. It’s best practice for private companies to have a share capital denominated in £0.01 or below, and at least 10,000 shares outstanding. To achieve this, you may need to split existing shares into two or more parts each.

Benefits of a share split

Splitting (or subdividing) shares has two main benefits: it helps companies achieve sufficient granularity and flexibility when creating an incentive pool, while allowing them to set an affordable exercise price for employee equity.

Imagine that two co-founders – each holding five shares with a nominal value of £1000 per share – want to set aside some equity to reward future hires. With a total share capital of ten shares, they could allocate two additional shares to create a 16.67% pool.

In practice, this is an extremely inflexible and unscalable approach to equity compensation. With such a small amount of shares in the pool, the founders could only grant options to one or two employees (as it’s not possible to issue fractional shares). In addition, the high nominal share value would make it both costly and risky for employees to exercise their options – paying £1000 to acquire a single share with no guarantee of liquidity.

Fortunately, these challenges can be addressed by a share split. In the above example, the founders could split their combined ownership of ten shares into 1,000,000 shares – each with a nominal value of £0.01 – and create a 20% option pool containing 250,000 shares. Having a reasonably sized pool would enable them to grant equity to more employees and use market-standard vesting schedules. It would also be much more affordable for an employee to exercise their options and become a shareholder, since they’d only need to pay £0.01 per share rather than £1000.

How to split shares in a company

Before making changes to your company’s capital structure, you’ll need to check whether:

• Your articles of association allow a share split

• You have a shareholders' agreement in place

• The proposed split is appropriate

To perform a share split, you’ll typically need permission from your board of directors – and, in some cases, existing shareholders. This involves passing a shareholder resolution and updating your articles of association (to reflect the new number of shares outstanding and nominal value), so it’s recommended to seek guidance from a lawyer during this process.

After executing the necessary legal documents, you’ll need to update your cap table to reflect the share split and file an SH02 (officially known as a ‘Notice of consolidation, sub-division, redemption of shares or re-conversion of stock into shares’) with Companies House.

With Carta, you can record share adjustments, publish changes to your cap table and generate an automatically populated SH02 form in a matter of minutes – all on a single platform. To learn more about how Carta simplifies equity management for scaling companies, speak to a member of our team.