Shares 101: Understanding shares ownership and investment

Shares are legal rights that represent a shareholder’s stake in a company. In addition to shares subscription, a company may also issue warrants (i.e. an investment instrument which grants an option to the holder to convert the warrants into shares), but we won’t cover it in this post. 

It is common for a company to issue different types of shares, as each type of shares provides different rights to its shareholders. The type of shares that can be issued by companies are usually governed by the company law depending on where your startup is domiciled.

Considering that traditional bank loans are out of the question, for most startups, the usual way for founders to raise funds in their company is to sell the equity stake in the company in exchange for cash. In exchange for the new capital, the company will issue new shares, either ordinary shares or preference shares, to the investor, who will be a new shareholder in the company. 

Consequently, deciding on the investment shares is crucial for making informed capital-raising decisions.   

Also Read: Laws, capitalism, creators and AI

This table summarises the key differences between ordinary and preference shares.

What are ordinary shares?

Ordinary shares (or ‘common stock’) represent the equity stake in a company. As a founder, founders’ shares are typically issued when a startup is formed before any equity is purchased by future investors or VCs. Ordinary shares confer voting rights, allowing the ordinary shareholder to influence the company’s direction. 

However, in terms of financial returns, company law ranks ordinary shareholders at the absolute bottom of the order of priority. Dividends, if any, are paid out only after all other obligations, including those to creditors and preference shareholders, are met before any distribution may be made to the ordinary shareholders.   

Prior to a capital raising exercise, a company’s shares capital may initially consist of ordinary shares held by the founders and angels.

What are preference shares?

A preference share (also called ‘preferred stock’) is a class of shares which offers its holders a more secure position. These preference shares usually come with preferential rights, such as priority in receiving dividends and asset distribution in the event of a liquidation. 

Also Read: The secret sauce of de-risking early-stage venture capital

In our experience acting as the law firm for VCs at Izwan & Partners, VCs usually insist on “watertight” agreements that seek to mitigate the risks they take with their investment (as VCs are expected to finance unproven companies). 

For instance, although company law states that preference shareholders by default may not have any voting rights, most or all holders of preference shares expect to have voting rights. Additionally, preference shareholders may yield influence through clauses like reserved matters, anti-dilution protection, and board representation. 

When negotiating a preference share issuance, founders should consider the following matters:

• Investor category: Generally, if the investor is a financial investor (i.e. a professional investor that deploys capital on a professional basis) like VCs and corporates, you may expect preference shares to be the default investment instrument. 
• Valuation: The company’s valuation will affect the conversion price of preference shares into ordinary shares. The conversion ratio formula is usually agreed upon at the time of the investment and is based on factors such as the preference share’s issue price, conversion price, or a predetermined formula. For instance, if the conversion ratio is set at 1:1, each preference share is converted into one ordinary share.
• Liquidation preference: As a VC, liquidation preferences allow for some form of capital protection for its capital investment. In the financial context, liquidation preferences are usually expressed as a multiple of the original investment. The “1x” means a VC will get a dollar back for every dollar invested, a full recouping of their money (in practice, the entire scenario only works on the basis that there’s enough cash to cover this, while ordinary shareholders will receive what’s left — if there is money left over of course).
• Exit strategy: A VC usually investment holding period in an investee is between two to five  years. Therefore, the founders’ exit plans (IPO, acquisition) would need to be aligned with the preference share structure. 
• Control: The level of control founders wish to retain will impact voting rights and other governance provisions, such as negotiating a set of reserved matters (i.e. actions that the company must not do without the approval of the investor) that will not stifle the daily operations of the business.

A startup lawyer can help you go through the term sheet to ensure that all the investment terms are industry standard terms, and help you negotiate (as you are usually at the highest negotiating point during the term sheet in contrast to subsequent rounds when the definitive documents are being prepared usually by the investor’s lawyer). 

Final thoughts  

Ordinary shares, while carrying voting rights, offer limited financial protection to the holders. As an investor, preference shares offer a range of benefits, including dividend preferences, liquidation preferences, in addition to the existing contractual rights such as anti-dilution protection and reserved matters. While preference shares offer greater flexibility when it comes to structuring the shares issuance, it can also be complex and confusing to structure due to the wide range of features available. 

As a founder, engaging a startup and venture lawyer as early as possible prior to your capital raising exercise can help you ensure that you’re aligned in terms of your investment expectations when dealing with investors while complying with the applicable securities laws. 

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Aleta Planet, a Singapore-based company providing cross-border payment services for businesses in the Middle East, has secured undisclosed investment from National Pulse, a Dubai-based company focused on tech-driven businesses.

The investment will allow the fintech firm to expand its footprint in the UAE, Middle East, and Africa.

Also Read: Cross-border payments: Can incumbent banks compete with fintechs in Asia?

Dubai will henceforth serve as Aleta Planet’s global headquarters, while the Singapore office will support expansion in the Southeast Asian region.

Aleta Planet founder and Group Chairman Ryan Gwee said: “This investment by a savvy investor with deep experience and contacts in the Middle East, will super-charge our efforts to expand B2B payments in the region as well as the global markets of China, Africa and Europe.”

The startup plans to establish a joint venture with National Pulse to focus on B2B cross-border transactions, initially targeting the Middle East’s agri-trade and logistics sectors.

Founded in 2014 by former banker Gwee, Aleta Planet aims to simplify online, cross-border and multi-currency transactions. Its network lets individuals and businesses deposit local currencies in 39 countries or remit funds to 140 countries. In addition, it provides merchant acquisition, card issuance, remittance and B2B payments.

The company, licensed by the Monetary Authority of Singapore, also has offices in Hong Kong, Dubai, Spain, and Malaysia.

Mohammad Bin Markhan Al Ketbi, founder and Group Chairman of National Pulse, said: “Aleta Planet’s innovative and transformative technologies are reshaping how cross-border transactions are managed. Their expertise in handling multi-currency transactions will greatly enhance our upcoming digital solutions, set to revolutionise the international trade and digital economy landscape.”

National Pulse invests in and partners with companies that provide innovative technologies to support the digital transformation for a swathe of traditional businesses in financial services, education, healthcare, agriculture, commerce, etc. It also runs the NatOne Venture Accelerator
Programme to help young companies navigate new markets and seek high-potential opportunities.

Also Read: Huawei Pay joins hands with Aleta Planet to introduce NFC, QR code payments for S’pore users

The investment in Aleta Planet comes when the market for financial technology in the UAE is poised for growth and is projected to expand at double-digit rates in the coming years. The UAE is ranked as the leading fintech hub in the Middle East and Africa regions, with funding jumping 92 per cent to US$1.3 billion in 2023, in contrast to a global decline in funding for the sector, according to Kapronasia, a consulting firm on payments, banking and capital market industries in Asia.

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As AI technologies continue to advance in Southeast Asia, it is crucial to address the social considerations surrounding their development and implementation.

As part of e27‘s flagship conference, the Echelon X panel discussion, titled ‘Responsible AI in Southeast Asia: How do we go about it?’, delved into a conversation on the ethical and societal implications of artificial intelligence (AI) adoption in the region.

Moderated by Scott Bales, Keynote Speaker and Thought Leader at ODE Management, the panel featured esteemed speakers:

• Niki Luhur, Group CEO, Vida Digital Identity
• Jayotika Mohan, APAC Head of Startups & SMB, Google Cloud, Google
• Yasunori Kinebuchi, Director, NTT
• Sau Sheong Chang, Deputy Chief Executive, Product and Engineering, GovTech Singapore

The panel discussion explored the nuances of responsible AI, highlighting the importance of ethical guidelines, transparency, and accountability in AI development and deployment. It underscored the need for a balanced approach that maximizes AI’s benefits while mitigating potential risks and ensuring that technology serves society’s greater good.

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Fundraising or preparing your startup for fundraising? Build your investor network, search from 400+ SEA investors on e27, and get connected or get insights regarding fundraising. Try e27 Pro for free today.

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In a recent conversation with e27, Anchanto CEO Vaibhav Dabhade discussed the recent trends in the Southeast Asian e-commerce sector and changes since the COVID-19 pandemic. He focuses on the end of the era of supply-led growth in e-commerce.

“What we have seen in the last two to three years is that the inflexion point has been reached,” he begins.

“So, today, the supply-led growth is very much finished. The actual growth of e-commerce is where we are currently, where it is largely driven by consumers’ choices. The demand-driven e-commerce growth phase that we are in today is much slower than when it was supply-driven. We are at the point where e-commerce is becoming more predictable, but we can assess and forecast much better.”

Dabhade also notes that after a period of cash-burning by brands and e-commerce platforms to generate demand through promotions, they have finally toned down to a level of normalcy. “Discounts are getting to a normal level; we also started to see that spending has become much more realistic. Many small businesses survived post-pandemic, but brands that were grown solely by discounts did not.”

“Marketing-led correction has not had a good time since the pandemic.”

Also Read: Ecosystem Roundup: Anchanto raises US$12M; MAS earmarks US$182M more to boost fintech innovation; How Tiki manages to keep employee churn rate healthy

Responding to these changes, Anchanto shifted its focus to adapt to changing market conditions. The e-commerce and logistics solution provider now focuses on the mid-market and enterprise segments of its customers.

To deliver high-quality service, Anchanto educates its customers about the importance of paying a worthy price. “When you start to go with platforms purely driven by discounts, you end up paying more in the long run. Many brands also realise that when they use a logistics company and cheap software, they will eventually struggle. They can’t scale … as they don’t get the needed expertise and depth.”

“This is why we are very cautious about price points. To whom do we sell? How do we sell? At what price point? We’ve been more selective about that lately.”

There is also a greater emphasis on product functionality, as Anchanto promotes its platform as a tool to provide insights, not just to help with logistics or warehousing.

“We give them a much deeper insight based upon the data we have with us, which is helping them to make better decisions.”

On being a growth stage startup in e-commerce and logistics

In a recent interview with e27, published exclusively for Pro members, Dabhade spoke about the key milestones that Anchanto had achieved recently.

Also Read: Thailand’s APX Logistics nets funding from SBI Ven Capital for Vietnam expansion

Apart from operating in 11 countries, the company hired senior roles and entered unique segments such as the B2B and Muslim commerce segments.

According to the CEO, significant milestones that Anchanto has made include hiring senior roles that it has been expecting to do for a long time, such as a Chief People Officer and a Chief Product Officer. It has also acquired customers from specific segments, such as the B2B and Muslim commerce segments.

“We see good tractions coming from the Muslim fashion industry in Southeast Asia,” Dabhade says.

Having raised a US$12 million Series C funding round in 2020 from MDI Ventures and Ascendia, Anchanto claimed to have achieved profitability even back then.

“We are super proud that, in 2023, we grew Anchanto by 42 per cent. We are very, very proud of delivering that level of growth in the current economic situation,” Dabhade says.

“We believe this shows that we are on the right track and can grow further. In a lackadaisical market situation, our business model is working.”

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Image Credit: Anchanto

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Decentralised Physical Infrastructure (DePIN) is set to become a US$1+ trillion sector over the next decade. Retail users, both merchants and consumers, will benefit the most from this growth. 

Projects like BitTorrent and Tor showed the power of decentralised resource-sharing systems. Emerging DePIN networks are building on this foundation. But their scope is much bigger now, thanks to blockchain, cryptography, and AI. 

Today, a few giant corporations have disproportionate control over the world’s data, as well as hardware and computational resources. One, this is risky, as the recent Microsoft outage showed. 

Two, it’s unfair to the grassroots entities who are the producers of monetisable data and consumers of hardware. They are the real source of value in this sense. 

DePIN can fix this and catalyse a paradigm shift. Users can monetise excess computational or hardware resources or, say, their vehicles’ data. Merchants can accept crypto payments through blockchain-native PoS machines. 

Through all these, retail entities can be more direct, autonomous participants in the phygital economies of the future. DePIN, the Great Democratiser (or access/opportunity equaliser), has thus also been one of the leading crypto narratives in 2024. 

DePINs are here to thrive

Though still nascent, the DePIN ecosystem has both negative and positive forces working in its favour. On the one hand, the downsides of hardware and software monopoly are becoming increasingly visible even to average users. 

There was no need for thousands of people and businesses to remain stranded for hours, losing hundreds of thousands of dollars. This situation would not arise if the world ran on decentralised infrastructure with in-built redundancy and resilience. That’s DePIN’s significance by negation — it is what legacy infra is not. 

As for the positive side, it opens many unprecedented avenues to become valuable in its own right. While seeding torrent files to support peer-to-peer downloads has been possible for years, it does not bring any monetary gains for seeders. DePIN changes that enable incentives over and above goodwill or ideology. 

Also Read: Securing the future: Transforming industries through blockchain’s immutable ledgers

That also means DePINs make monetary incentives for resource contributions the norm and not a choice. Moreover, using DePIN networks makes individuals resistant to censorship and manipulation, especially in crisis times. 

For instance, it’s pretty impossible to execute an internet blackout by shutting down a decentralised WiFi network. Because here, the supporting physical infra — modems, routers, etc. — are distributed across a wide geographical region and are not situated in a single, identifiable, and stoppable location. 

At the same time, communities can become more self-sufficient and reduce living costs by sharing energy via decentralised grids. Smaller businesses can also hedge against depreciating local currencies by using stablecoins or crypto for day-to-day transactions. 

The possibilities are endless. That’s why over 17 million DePIN devices are already in action worldwide, and the sector’s market cap has crossed US$24 billion within a year or two. 

Further, AI’s rapid growth is a strong external catalyst for DePIN’s upcoming growth both on the demand and supply sides. From decentralised compute marketplaces to smart AI-powered sensors, these two are made for each other, so to speak.  

Overall, DePIN is not merely here to stay but to thrive. But like any booming, there is a need for caution. 

What is DePIN and what is not

Once, every crypto project had something to do with DeFi. Then, they fell for NFTs. AI was the next cool kid on the block. Many others came and went by in the past few years. 

Now it’s DePIN’s turn. It has great promise, and existing projects are already showing decent results. Investors and VCs are very interested in this, as well. So naturally, every other project calls itself DePIN. 

Also Read: The emerging crypto trend of 2024: The intersection of AI and blockchain

While the attention and hype are great from a short-term adoption perspective, it’s important to define and recognise what is DePIN and what is not. 

Simply put, a real DePIN project must build and provide some hardware devices: routers, PoS machines, storage systems, etc. ‘Physical infrastructure’ is in the sector’s name, after all. While this seems trivial and obvious, it’s not so in reality. 

Digital-only projects offering decentralised computation, payment services, etc., often stake claims on the DePIN fame. And while they may have great products to offer, they are not DePINs. 

Moreover, DePIN projects must implement distributed governance models based on hardware ownership. Network participants must receive substantial monetary incentives for their contributions. 

DePIN is a fairly new paradigm and recognising its core differentiators from the get-go is important from a long-term growth and stability perspective. 

Last but not least, it’s essential that retail users get a clear sense of why this matters to them and why they must care. 

Although not a ‘number go higher’ game in the literal sense, more retail participation is the key to stronger, more robust DePIN networks. And unlike in legacy setups, it’s best if participants know their stakes as well as duties. Because autonomy without knowledge is incomplete.

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Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic.

Join our e27 Telegram group, FB community, or like the e27 Facebook page.

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