Hi folks,
The situation simply put:
I have a company with capital of $1 million (one shareholder owns 100%). It is now worth $4 million ($4/share).
The company would like to include a strategic investor (new shareholder) with new investment of $8 million in the company in form of Capital increase.
The question:
How would be new capital structure after the capital increase given that the original shareholder keeps his shares worth of $4 million?
Thanks
Well… it depends dude. It depends on a bunch of things. The new capital structure could be a 100 different ways.
The new investor could say. - i want 99% of your company for $8m… i don’t give 2 craps about how much you’ve already put into the company. He’ll buy 99% of $8m and the new share structure will effectively be 99 - 1 shares to new investor.
The current owner could say, i’ll give you 1% of my company for $8m…
If the new investor is buying the same shareclass at $4 / share, then he’'ll own 2/3rds of the new company with the remaining 1/3rd left to the current owner.
Thank you pokhim
But how will the capital structure look like in the equity? I mean will there be a Premium account in addition to the capital? and on what breakdown?
pokhim? Anybody?
Thanks
Well again, it depends. If the company issues 1 million shares with 1 dollar nominal each and he subscribes for 8 million, there will be 1 million more share capital and 7 million premium. If the newly issued shares are 8 million with 1 dollar nominal, the entire increase would be in share capital and none in premium.
But how can the original shareholder receives the fair value of his original shares (now it is worth $4mm vs $1mm paid up capital)? i.e. the company now is worth $4/share not the nominal $1/share.
So how can we encounter the $4/share in the capital structure so that the original shareholder gets a fair deal?
Thanks
The original shareholder is not getting anything, why would he? Your question was related to a situation where the company is including the new investor and the old one keeps his shares. For the original shareholder to get anything, he must sell (or otherwise monetize) his shares. But that won’t affect the company equity at all.
The original owner should not get anything, but also the new shareholder should not pay the par of $1 for a company worth of $4/share. This is what I mean.
SO how can we encounter the fair valuation in this?
The new shareholder-to-be will negotiate with the company and pay whatever they agree. If it’s 4 per share for shares with nominal of 1, share capital will increase by 1 million, reserves by 3 million.
100% capital increase will lead to total equity of $5mm ($2mm capital 1+1 and $3 mm premium).
The owners own 50% each
the original owner owns now $2.5 mm of equity, while he was owning 1mm capital worth of 4mm…I am confused :s
His share was diluted, so yes, that’s correct. Usually original shareholders have first right to newly issued shares, in order to avoid their shareholdings gettig diluted like this.
Thanks a lot Nenorr