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During the incorporation of a company, my business partner and I decided to put in $1000 for 1000 shares in the new company. The equity was split 33%, 67%. So I had 670 shares, and business partner had 330 shares. Soon after, an investor came along and he wanted to put in $50,000 for 1/3 share of the company. However, our shares were 'purchased' at $/share hence $1000 gave us 1000 shares. If the investor purchases shares from the company at $1/share he would have 50,000 shares which will easily dwarf the shares that the founders own. This would not make any sense.

So, the founders decided to put in $10,000 each and each get 1/3 share of the company. We indicated that we would use the $20,000 ($10,000 each x 2) to purchase our total shares at $0.20/share instead of $1/share to make it 100,000 shares (0.2 x 100,000). Now that we have 100,000 shares, and the investor has 50,000 shares, we would then be able to allocate 1/3 share to the investor as 50,000 shares over 150,000 shares make 1/3.

So that being said, we now have a paid up capital of $70,000 (10,000 + 10,000 +50,000) and the total shares at 150,000 shares.

We posted this to the corporate secretary handling our incorporation to process it as the new company structure, we were told that this cannot be done. Mainly because of the share price difference i.e $0.20/share and $1/share.

The problem in summary is this:

An investor is coming in with $50,000 for 1/3 of the company. We have only $20,000 for 2/3 of the company. How do we structure the share prices to make it so that we have 2/3 shares of the company and the investor has 1/3 shares of the company even though we have a smaller monetary contribution.

Of course if my understanding of this whole share price issue is totally warped, please feel free to correct me. Thanks.

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2 Answers

up vote 2 down vote

Your mistake appears to be in assuming that because you bought your shares for $1 per share, they are still only worth $1 per share. Shares change value. Your investor thinks the company is worth $150,000, or he wouldn't be willing to pay $50,000 for a third of it. That means your shares are worth $150 each right now. So you sell him 333 shares at $150 each. (Presumably you have both done some work for the company, thus adding value to it).

HOWEVER: The real answer to this is - you have a company secretary. Ask him/her how this should be done.

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up vote 0 down vote

I lost you somewhere after the second word.

Way 1:

You have 1000 shares with $1 basis each. You're selling 2/3 to the new investor for $50000. So the new investor ends up with 667 shares and you guys split the remaining 333: You 222, your partner 111, with a capital gain of $50000-basis. You invest additional money into the company (the $50K you got) to increase your basis. You pay tax on the $50K capital gain.

Way 2:

You own 1000 shares, and now its 100%. You want it to become 33%. Company issues additional 2000 shares, and sells them to the investor for $50K. You have 22% and 11% each left, investor has 66%. No-one pays tax, your basis stays the same. You're diluted. You invest your $20K to increase your basis.

Which one of these two options you were trying to describe?

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You're selling 1/3 to the new investor, I misread 2/3... Well, change the math accordingly, I hope you go the point:) – littleadv Jul 19 '12 at 5:28
Rather than bluntly downvoting, do share your thoughts on the matter and what it is you're disagreeing with. – littleadv Jul 19 '12 at 17:14

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