The Start\UP Brief: StartUps and Shares, covered those elements of shares that needed to be decided at registration. The implication of those decisions comes into play when you are looking for investment. If you never, ever, ever plan on seeking outside investment – from friends and family, angel investors or VC’s – you’re done. But just in case, you may want to keep reading.
Investing is basically selling part of your business in exchange for cash. So you sell a number of shares in your business for a negotiated sum of money. By the way, this is basically true for private companies and public companies – the difference being that when a private company “goes public” it offers it shares for sell with an “Initial Public Offering” or IPO.
Another couple of points regarding shares and share prices. If I own 100 shares in a company @ £1 per share, I have £100 of worth of stock in the company. I’d also have £100 of stock in a company if I had 1,000 shares @ 10p or 10 shares @ £10. The only real difference is share price.
Some companies, both public and private, like to “manage” their share price. Too big a share price creates an impression of “too expensive”. And in fact can keep small investors from buying. A extreme example of this is the share price for Berkshire Hathaway (Warren Buffet’s company). Last I looked it was $100,000+ per share. That keeps a lot if folks out!!!
But coincidentally, too small a share price creates a image of #fail. Penny stocks, those that trade at less than $1 are considered “distressed”.
So to “manage” share price, companies can choose to “split” their stock on occasions when they wish to have a smaller share price. A typical ”2 for 1 split” basically gives the shareholders two shares for every one they currently own, for half the price. A stock that was trading at £50 would be split into two, each at £25. In general an n for m split creates n/m shares at m/n the price.
Similarly a “reverse split” can be implemented to create a higher price per share. A 10 to 1 reverse split will take ten of your shares and give to one back, at ten times the price.
The purpose of this discussion on splits? Simply, if you’ve already registered a company and ended up with too big, or too small, a share price, a split can adjust it.
A interesting video on Cap Tables
http://www.youtube.com/watch?v=f4KagovcMdg
Patrick, that’s an excellent video and a good spreadsheet. If you’re fluent talking pre and post-money go for it
I finally found the info I need about the reverse split and other share related events on the Companies House website.
Chapter 7 of The Life of a Business – Share Capital:
http://www.companieshouse.gov.uk/about/gbhtml/gp3.shtml#ch7
SH02 – “Sub-division and consolidation of shares”, seems to be the form, if you’re in the typical situation of having say 100 issued shares from 100,000 allotted and you want to carry out a “reverse split”.
On a side note, I saw very little use of the term “reverse split” when I searched within the UK for this info for limited companies.
All I was getting was Reuters articles and the like, about this company and that having to go through a reverse split and how it is often a sign of a troubled business.
That looks spot on. I’m learning new terms. Split and reverse split are obviously US terms. In the UK it would be: subdivision and consolidation, but there is also redenomination?
Also, just to clarify – in my terms.
A split increases the number of shares and decreases the price, by the same ratio.
A reverse split decreases the number of shares and increases the price.
I hope I have been confusing folks.
According to that page:
10. Redenomination of share capital
Under the Companies Act 2006 any company limited by shares can (subject to prohibition or restriction in its articles) re-denominate its share capital, or any class of its share capital, into other currencies by passing a resolution.
So, is it just about changing the currency or also the share value?
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