Raising capital

[jpopat]

Hi all

Just a quick question re Ltd company raising equity finance.

If I set up a Ltd co with an initial £3k with a small group of friends, issuing 30,000 £0.10 shares, and then subsequently decide to raise a larger amount from external investors; £60k by creating new shares - and I only want the external inv. to hold c. 15% of the company, am I right in thinking I could create 5,294 new shares for the external investors? This would give those new shares a cost price of £11.33 though. Would that be an issue?

Thanks
Janak

 

[@aiteoconsulting]

The shares would be issued at the same nominal (£0.10 / share) with a share premium of £11.23 / share. Nothing problematic with the maths or legalities, the main issue being you would need to convince investors that your company is worth £400k at the point that they invest.

 

[Scalloway]

If you are issuing more ordinary shares the amount over and above £0.10 would have to go to a share premium account.

 

[@aiteoconsulting]

If you are issuing more ordinary shares the amount over and above £0.10 would have to go to a share premium account.

Jinx!

 

[jpopat]

Okay that's helpful - thank you.
Alternatively if I didn't want to dilute the existing share allocation between the original group of known investors, and decided to transfer a % of my own shareholding to the external investors, would there be any other implications? e.g. if I have 60% and decide to transfer 15% to the external investors

 

[Scalloway]

If you transfer your own shares you may have to pay capital gains tax on the sale. If you have not already done so I would recommend you engage an accountant to save you unnecessary tax and heartache.

 

[Ola1]

The obvious would be that you'd no longer, by yourself, have a controlling share of the business

 

[jpopat]

That's true, good point re CGT. So aside of having the issue of convincing the investors of the £400k value, I think I have two realistic options:

a) issue new shares, to equal a 15% to give to the new investors, but the risk is I dilute the shareholding of existing shareholders (is there a way around this?)

b) if I've allocated 30% to my parents for e.g. can I redeem 15% at the outset, for cost, cancel those shares, and then create new shares to give to the new investors?

 

[jpopat]

Also, when I create the original shares, in this case 30,000 - will Companies House allow me to keep a portion as unallocated?

 

[David Griffiths]

You really need to take professional advice on this, as you are bringing in other shareholders, some of whom are friends and some of whom are unknown to you. There are different consequences to the different options available to you and you have to balance the different factors, including the possibility that not all of the friends will actually stump up for shares and the possibility that you won't be able to get as much as you hope for from external sources.

You will also almost certainly need to have a proper shareholders agreement drawn up to govern the relationships between the shareholders, and lay down what the director(s) can or cannot do with or without permission of the investors. If this is not crystal clear at the outset it will lead to squabbles and you might well find that someone who is now a friend is not a friend in future. I'd also be astonished if any external investor (or any informed external investor) would put cash in without such an agreement

It simply isn't the kind of thing that you can do yourself, nor is it the kind of thing where you can pick it up from forums.

 

[jpopat]

Okay - we will be arranging shareholder agreements without a doubt. I just wondered if there were any other obvious legal implications with cancelling some of the existing shares at nominal value and reissuing to the new shareholders.

As we also want to be eligible for SEIS relief for the key shareholders, most of whom are directors we may need to get professional advice from tax advisors. I just wanted to see what I can pick up from here. Very much appreciate the advice so far.

 

[qul]

We deal with SEIS and share issues (but not shareholder agreements) for tech startups but its a bit tricky to see how many rounds you have and what exactly you want as you've mentioned a number of different scenarios and different %s eg60/30/15 but a typical scenario would be:

1) setup a share cap table to work out the expected dilutions
2) you open the company as sole shareholder
3) if your parents are giving cash, open the company bank account before receiving their cash and issuing them new shares to qualify for SEIS. if your parents are not giving cash, you can issue them shares on incorporation at the same time as yourself
4) issue new shares to external investors and dilute yourself and/or your parents.

If you decide to use a shareholders agreement then you can insert a standard clause for anti-dilution that new shares have to be offered on a pre-emptive basis to existing shareholders, so that they can invest more money to avoid being diluted when you raise further finance. Alternatively some clients have agreed to issue free shares to existing shareholders.

Its difficult to cancel shares, much simpler to issue new shares and dilute. Your shares at Companies House have to add up to 100% so you can't have a portion as unallocated, but you can issue restricted shares which don't have full/vested voting rights, although these can sometimes have tax consequences.

please do get in touch if you'd like a quote to set this up for you and claim SEIS

 

[jpopat]

Thanks for the reply qul, some really useful points to consider there.

If hypothetically we intend on initiall raising c. £3k from 30,000 shares, and then in 4-6 months need a second round capital raise of c. £60k, for which we may give 20% equity, if we go down the route of doing this by issuing new shares, so 7,500 new shares - how can we prevent the initial shareholders from being diluted?

Unsure what a share cap table might look like..

 

[@aiteoconsulting]

In general terms, the existing shareholders would need to top up their shareholdings (and would have the right to do so) if they don't want to be diluted. You could create different classes of shares with different rights to try to protect the initial shareholders. However, I would expect new investors to ask why you are raising further funds for a company that has fallen in value within 4-6 months.

 

[jpopat]

How would the company have fallen in value? I appreciate we would have to justify why their 20% is worth £60k (for e.g.), and why effectively that values the company at £300k. But I don't follow why the value would have fallen...

 

[@aiteoconsulting]

The company would have been valued at £400k in the first round of funding (£60k for 15%), so 20% for £60k means a fall in value.

 

[jpopat]

ok that makes - lets assume 20%, not 15%.
Another alternative I might consider is issuing subscription warrants for the $60k; are these widely used?