How to issue shares to a new investor
Jeff
9 Comments
So lets say you need to grow your business and you need money to do that. How do you actually give equity to the new investor? This is one of those questions that I would not have thought to answer if someone didn't ask, so I'm glad John came along and asked that himself.
John writes:
I have formed a company with my senior brother. We are into distributive marketing. I came up with the idea and all strategies.I do not have the capital. I will be managing the business because of my experience in the sector we are operating in. Shareholding was 51% for my brother and 49% for me. My brother suggests that since we cannot raise all the funds we should bring in another person and sell our shares to him for as much as he can buy for funds. I need guidance since am the engine of the business.
So first off, yes, if you need money you need money, and you're going to have to find a way to get it from somewhere. Perhaps you can get a loan, or perhaps you need to bring on an outside investor.
Since you didn't say how much you were looking for, I'm going to make the assumption that you've decided that a loan is out of the question, leaving you with the option of finding an investor. The tricky part is actually finding someone and convincing them to give you the money of course, but once that's done, your attorneys should take care of the details of how to actually handle that transaction. But, let me explain how it usually works.
You normally would not actually sell your shares to the new investor. Instead, the company would issue new shares, increasing the total number of shares in the company, and diluting your ownership proportionally. This is a much simpler method than calculating how many shares each existing owner would need to sell, and then, of course, convincing every shareholder to actually make the sale. While it might not seem too bad for just you and your brother, imagine if you had 5, 10, or 100 shareholders and had to do the same transaction. That would be a nasty mess no one would want to deal with.
Issuing new shares avoids all this complication because it's simply one transaction between the company and the investor, instead of a whole series of transactions between every shareholder and the new investor.
So, by example, lets say that you had a corporation with 100,000 shares of stock, and that you owned 49,000 of these shares and your brother owned 51,000. Now, you want to raise some cash, and so you find someone who is willing to make an investment in exchange for, say, 40% of the company. That means, of course, that after the transaction you and your brother, combined, will still have your 100,000 shares, and those shares will represent 60% of the stock.
The math is then straightforward. The total number of shares will now be (100,000 / 60%) or 166,667 shares, meaning that the new investor will be given 66,667 shares in exchange for their money, and will now own 40% of the company. You would still own 49,000 shares, but that now represents (49,000 / 166,667) or 29.4% of the company. Your brother will still own his 51,000 shares which now represents (51,000 / 166,667) or 30.6% of the company.
In summary then, after the investment:
- New Investor : 66,667 shares = 40.0% ownership
- Brother: 51,000 shares = 30.6% ownership
- You: 49,000 shares = 29.4% ownership
If you bring in a new investor after this one then the procedure is the same - you'll issue new shares to the new investor, and all the existing shareholders will keep what they have, but they now represent less percent ownership of the overall company.
I hope this helps, and good luck raising the capital you need!
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Reader Comments (9)
great advice thanks
I have a company that was formed with 2700 shares PPS .01. This was done to avoid tax issue while we were spending but not sure if the idea was going to become a business. Ok So now there is a company with a 3MM valuation, and a deal for $300K that we are offering 20%.
How do I do this?
If all authorized shares (when company was initially registered and incorporated) have been issued, would we have to go back to the state and re-register with the more authorized shares in order to issue the additional shares to new investors? In other words, how does one 'add' shares if all authorized shares have been issued?
Really helpful information - thanks for taking the time to post it. I needed this to work out share allocations for new investors, and they want 40% coincidentally - don't even have to change the figures in your example! Cheers
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