When you take an investment in your company, generally you are selling shares for an agreed (and negotiated) price. In general you take £x for y shares, and by simple arithmetic you can see that you’ve sold the shares each for £x/y per share. That deceptively simple calculation has some very interesting consequences, based on how things had been setup at registration time.
Consider two companies.
Company A has issued 200,000 shares and Company B has issued 2 shares. In both cases they are seeking £100,000 investment. All that is needed is to decide either the number of shares that they will sell, or the share price and that will determine the number of shares they will sell for the investment.
Company B has a real challenge. Each founder owns 50% of the company – each has 1 share of the 2 issued. If they sell another share, the number issued is now 3, and their ownership is diluted to 33% (each now only has 1 share of the 3 issued.) And the share price is now £100,000 per share. By the same logic, if they sell two shares for the £100,000 they have diluted to 25% (each now has 1 share of the 4 issued). But at least the share price is down to £50,000 per share! The more shares you issue the more you get diluted.
On the other hand, Company A has a lot more flexibility. They can sell 25,000 shares for £100,000 – making the share price £4 per share. But now the dilution looks a lot different. Before this investment they each owned 100,000 of the 200,000 shared issued – 50%. But after the transaction they each own 100,000 of the 225,000 issued, or approximatekt 44%.
That littlest of things at registration, cost the founders 22% of equity.
So I’m lucky to have registered with 100,000 then? Just missing an investor now!
Is that that 100,000 authorized or issued?
The default for most UK based limited companies seems to be !00,000 authorized shares.
In my case even though there were 100,000 authorized shares I only allocated two shares and those were give to the Managing Director.
In the articles of association it states that only the MD can issue shares.
Then you have to think about the issue here. You have 2 shares issued. Let’s say you get an investment. The MINIMUM number of shares you can issue for that investment is 1. So the MD had 100% of the company (2 shares of the 2 issued). Now with the new share the MD has 67% of the company (2 shares of the 3 issued). The “pie” got bigger, the MD’s shares stayed the same, so his/her slice of the pie (ownership) got smaller – that’s dilution.
You can establish governance as you please in the Articles of Association. Personally, I prefer to have it as a board decision.
I am clear on dilution, you expect to be diluted with investment but at the same time the company will grow and so will your share £$ within the company grows.
if I wanted to issue the remaining available shares to myself 98,998 x 1p i’d have to put £9,999 into the company myself would that be correct. Can the MD/Board issue shares without putting a price on them. I remember working in a company that give us x amount of shares each year as we worked there as part of our salary. Is there a way in which the only employee (MD) can allocate the remaining shares to the maximum 100,000. So that if an investor did want to invest the cap table looked more reasonable on the share price.
Allocating the maximum number of shares at the start squeezes the most potential out any potential business. Maximum number of possibles shares at the lowest prices when the business is formed pays of as the business grows and takes in investment.
The registered business im referring to is “R8 Your Politician Ltd” , Ideally what I would like to do is , register “R8 Technology” as the main business and acquire the “R8 Your Politician Ltd” into the R8 Technology company as it had been registered before the plans for R8 Technology were put together. This would get around that issue of having only 2 allocated shares allocated and having to do a reverse split on the shares.
The R8 Technology company would be registered correctly issuing the maximum amount of shares and then simply acquire the other company “R8 Your Politician Ltd” into it. That way the R8 Technology company complete with its flag ship websites from R8 Your Politician would be structured correctly for any potential investors.
The other way to go about it is, wind up the R8 Your Politician Ltd company no outstanding debts, healthy and has a some cash in the account, close it down and open the R8 Technology company correctly structured.
Patrick, I’m going to start this will a BIG … Consult a tax or corporate attorney.
But having said that, I’d really consider keeping it simple. A reverse 50:1 split, will given you 5,000,000 outstanding shares and your 2 will become 100 – which is better than 2.
Also, AFAIK here, the board, or whomever is designated in our Articles of Incorporation (=your Articles of Association) can give shares. But there are potential tax consequences as a result. I have no idea how it is treated there.
Matt / Marty, this would be a great Start\UP; Meet The Experts topic?
Ok, enter the corporate lawyer…..
David has highlighted the issue above of how to work around a situation which occurs when you have say 2 £1 shares in issue held by the founder and you have an investor who wants to buy into the company getting say 20%of the post investment equity for £100k.
There are two solutions: either the founder adapts to meet the scenario or the share capital is varied to do likewise.
Founder adapts: this works best when the founder(s) is/are the only shareholder(s). In the above example the founder would simply issue another two shares to himself at par value (i.e. a cost of £2) and then issue a further single share to the investor for £100k. Since the founder is the only shareholder it doesn’t really matter what price the shares are issued to him at since he started with 100% and ended with 100%of the company . Anyone querying why the company issued shares at an apparent undervalue would have to concede that the founder has put more money into it for no more than he had originally i.e. he made no gain. The founder will control the board so he can do as he pleases effectively.
Share capital adapts: split the £1 shares into 1p shares so the founder holds 200 shares. Then the company issues 50 new 1p shares for £100k at a price of £2k per share. End result is that there are 250 shares in issue, the founder with 200 and the investor with 50.
Generally the trcikier problems with share capital arises where investment is actually based on a proper valuation so that say the investor agrees to put in £50k, but the company valuation agreed is very specific because it is based on an up to date balance sheet value of, say £346,780. In this example £50k would equate to 14.41836% of the fully diluted post investment equity. What do you do then if you only have 2 £1 shares in issue? Well you are back to option 1 above by finding a way to turn 2 shares into a whole number of shares which are divisible by 85.558164. Even the most difficult founder doesn’t usually quible about going beyond two decimal places at this stage in a fund raising so if you round up the % which the founder wishes to be left with to 85.56% that means you need a minimum of 8556 shares to be held by the founder immediately pre investment. You could again go for the £1 share split into 100 1p shares solution. This would mean that the founder would have 200 shares but still needs another 8356 shares to get to the magic 8556 number. Simply he subscribes at par value for the 8356 shares at 1p each which equates to £83.56. That amount can be reduced if you split the £1 shares into 0.5p shares or 0.1p shares but there comes a point where the legal paperwork will cost the founder more than the £83.56 you would have had to pay out by keeping it relatively simple in the first place!
Patrick, as to your question on whether a company can issue shares without putting a price on them – the answer is that under UK company law there is no max price a company issue a share at but it cannot issue a share for less than the share’s nominal or par value. Also if you are an employee of a company you need to be careful in the UK if you receive shares from your employer company which you do not pay market price for as HMRC will argue that the difference between what you paid and the true market value is in effect a taxable benefit and you will be liable to pay income tax and employees NIC and the company will have to pay employer’s NIC on the balance. Not a good thing…..this is why it is good to use the tax efficient share option schemes such as EMI which are out there.
Happy to field any questions or take part in a Meet/Beat the Expert event in this area.
Scott
Scott, Thnaks for jumping in here, very, very welcome.
We’re – for sure – going to take you up on the Meet the Expert — no beatings.
/d
In preparing to sort this sub-division problem out, i’m wondering, is there a ‘good’ share price to be setting from the outset?
when starting out, Is it better to have many outstanding shares at a lower par value, or fewer, higher value shares? say 100,000 @ £1 versus 10,000 @ £10?
rich
Or even 5,000,000 @ 10p?
Here’s a little litmus test.
If you ever went to an IPO, what price would you set … $15? Set an imaginary price and play through the secarios of setting additional equity, managing dilution, and ending up with a price in the ball park of your target price. An interesting exercise.
/d
works just as well!