Preference shares, also known as preferred shares, are a type of equity security that combines features of both equity and debt. Companies issue preference shares to raise capital, and investors who hold these shares receive preferential treatment in terms of dividends and liquidation proceeds compared to common shareholders.
Key features of preference shares include:
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Dividends:
Preference shareholders have a priority claim on dividends. The company pays dividends to preference shareholders before distributing them to common shareholders. The dividend rate is usually fixed, providing a stable income for preference shareholders.
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Liquidation Preference:
In the event of the company liquidating its assets, preference shareholders are entitled to receive their initial investment back before common shareholders. This gives them a higher claim on the company’s assets during liquidation.
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No Voting Rights:
In many cases, preference shareholders do not have voting rights or have limited voting rights compared to common shareholders. They might not be involved in major decision-making processes of the company.
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Convertible or Non-Convertible:
Some preference shares come with an option to convert them into common shares after a specified period. These are called convertible preference shares. Non-convertible preference shares do not offer this option.
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Cumulative or Non-Cumulative:
Cumulative preference shares entitle the shareholder to receive any unpaid dividends in the future, even if the company didn’t pay dividends in previous years. Non-cumulative preference shares do not accumulate unpaid dividends.
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Redeemable or Irredeemable:
Redeemable preference shares can be bought back by the company after a specified period. Irredeemable preference shares cannot be bought back by the company.
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Equity Crowdfunding:
Similar to traditional crowdfunding, equity crowdfunding allows investors to buy shares in a startup. Platforms like SeedInvest or Crowdcube facilitate these investments.
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Initial Coin Offerings (ICOs) and Token Sales:
In the blockchain and cryptocurrency space, startups may conduct ICOs or token sales to raise funds by issuing digital tokens. These tokens can represent ownership, utility, or access rights.
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Corporate Investments:
Some startups receive funding from established corporations seeking strategic partnerships or access to innovative technologies. Corporate venture capital (CVC) is a common form of such investments.
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Debt Financing:
Startups can also raise funds through loans or lines of credit. This involves borrowing money with the commitment to repay it over time with interest.