I. Dilemma between Seeking funding and controlling the company
In spite of disruptive technologies and creativity in their business, startups tend to face a challenge of insufficient capital and the difficulties to find funding. Seeking external funds or angel investors is always a major issue of core shareholders of a startup in its early stage. Even if angel investors are located, they would require certain amount of equity in the startups. Core shareholders should know how to, within the scope permitted by laws, properly arrange allocation of equity and maintain the control of the company to operate and develop the business.
II. Amendment of the Company Act (August 2018): Deregulation of Funding channels for Startups
1. Share with Par Value or No-Par-Value Share
If a startup decides to establish a company limited by shares, it may choose to issue either share with par value (including nominal par value share) or no-par-value share. An existing company limited by shares may convert its par-value share into no-par-value shares by a special shareholders' resolution.
Before the amendment of the Company act in August 2018, the Company Act provides that companies may issue shares with par value only and the par value per share is NT$10. Now, startups choosing no-par-value shares can issue shares at different prices depending on different stages of the development. When seeking funds from external investors, startups may hold more shares even with a smaller amount of capital and continue to control and manage the company. In addition, investors usually will determine their amount of investment based on the valuation of the startup. With the option of issue no-par-value shares, it would be easier for the external investors to evaluate the company and facilitate the overall funding of startups. But it should be noted that all of the money gained from issuance of no-par-value shares shall be deemed as paid-in capital even though there is no restriction on the price of issuance.
For example, the founding shareholders may issue 800,000 shares at a lower price, say NT$ 0.01 per share. Then the paid-in capital of the company will be NT$80,000 upon incorporation. In the first round of investment by angel investors, the company issues 200,000 shares at NT$50 per share and receives a capital injection in the amount of NT$10,000,000. For the second round, if 250,000 shares are issued at NT$20 per share, NT$5,000,000 will be injected. After completion of two rounds of investment, the company's total paid-in capital will be NT$15,008,000. The proportion of shares held by the founding shareholders, first-round and second-round angel investors shall be 64%, 16% and 20% respectively.
2. Preferred Shares
After the amendment of the Company Act in August 2018, non-public companies are allowed to issue the following preferred shares: (1) with multiple voting rights, (2) with veto right on specific items, (3) non-transferable preferred shares, and (4) with restriction or prohibition from being elected as directors and/or supervisors or with limitation on the number of seats of directors. By issuing such preferred shares, it not only provides incentives to angel investors, but also protects their investment, while the founding shareholders' control over the company will not be compromised.
3. Voting Trust Agreement
Angel investors may use a voting trust agreement to impose a restriction on the business operation conducted by the founding shareholders (such as restriction on amending the scope of business set forth in the Articles of Incorporation, or merger with other companies) so as to protect their own interests in startups and help startups seek funding. However, a voting trust agreement shall be delivered to the company for registration at least 30 days before a general meeting or at least 15 days before a special meeting of shareholders; otherwise the company may deny the validity of such voting trust agreement.
III. Choice Between a Close Company or a Company Limited by Shares
A close company is originally designed for a relatively small number of shareholders who have a closer relationship, with restrictions of share transfer. The maximum of shareholders for a close company is 50 persons. In addition, the close company has the following features: the share may not be freely transferred, the structure of shareholders is relatively simple, the company governance is relatively free, and the scope for Articles of association is more flexible.
After the amendment of the Company Act (August 2018), the flexibility only a close company has been enjoying is also extended to non-public company limited by shares.
For example, according to the current Company Act, a non-public limited company is now allowed to have capital contributed in the form of the property or know-how, to issue preferred shares with multiple voting right, to issue shares with veto right on specific items, to issue preferred shares with restricted rights or no rights to be elected as directors and/or supervisors or the right to be elect certain number of directors, or to issue preferred share convertible to multiple common shares, etc. The company can also choose to issue non-par-value shares, convertible bonds, or to distribute dividends every six months or every quarter. It can be seen that the flexibility of use of capital and company governance is greatly improved and the gap between a non-public limited company and a close company is narrowing.