Basic Question about Issueing Shares to Investors

techietechie Posts: 4subscriber
edited September 2008 in Startup Funding
Hello everyone! Just signed up
I run a software company which is developing an exciting product. I have completely bootstrapped it so far with personal money for the entire 1st year. I now need to raise funds for the next phase of development.
I have a basic question about share holding which I am a bit confused about. When we incorporated the company, my accountant advised me to transfer in an amount of 1,000 to the company and issued me 1,000 shares in the company to start it. Since then, I have transferred in larger amounts of money from my personal account to the company account. My accountant said the company should issue me shares against the paid amounts too.
Now suppose I want to bring in an investor who is willing to invest 50,000 in the company for say a 10% stake, how does this work? So if I`ve put up a total amount of 100,000 for 100,000 shares, in order to collect 50,000 while giving the investor a 10% stake, the company would issue the new investor 11,111 shares at 4.5 each so that the new investor will have 11,111 out of 111,111 shares (10%).
Is this typically how it works? Does the denomination or number of shares I own have anything to do with giving a stake? When I asked my accountant about this, he said "we can manage it later any way we like", which was not a very satisfactory answer!
Thanks!

Comments

  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    techie,
    I see you are in the UK and things may be done a bit differently there - but in the US the "we can manage it later any way we like" comment would not hold true once you have an investor.
    In general, the valuation of the company is the key factor when taking in an investor. The share price is derived from it as well as the "percent" of ownership.In your example, the post money valuation would have be $500,000 if their $50,000 bought 10%
  • techietechie Posts: 4subscriber
    Robert, thanks for the answer. We do things more or less the same way in the UK
    The valuation part is clear... lets assume the investor is convinced that the company is valued at 500k.
    The math is where I am getting confused - do we need to do anything before taking the money from the investor? And how do we ensure in terms of shareholding that the investor owns 10%? Is my math above correct (issue him enough shares so that he owns 10% of the total shares)?
    Thanks
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    In your scenario, yes, he would be issued enough shares so that afterward he owns 10% of the "outstanding" shares or issued shares. (not the total authorized by the articles of incorporation)
    I`m assuming that there is just one class of stock.
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