Shares are of serious consequences when it comes to investment, ownership and control of a company. They are of monetary value too.
All companies in Nigeria have a minimum share capital of 1 million, which can be subsequently increased as the need arises.
So how do shares really work in a start-up?
Assuming Mr. A and Mr. B founded a Tech company Called AbujaMoney.
Assuming both of them decided to allot 50% of the company total shares to each other, meaning that they both have 500 thousand each of the company shares, totalling the company’s million shares.
So Mr. A has 500k shares = 50%
Mr. B has 500k shares = 50%
After a while, they began to make profit and generate revenue and the business was valued at a pre-money valuation of 40 million naira.
Mrs C decides to invest 10 million naira into the business.
How much shares will Mr A, B and Mrs C have in the company upon such investment?
How much will be their percentage shares in the company?
At what rate will Mr. A and Mr. B’s percentage in the company be devalued?
Assuming Mrs C invest 10 million naira in a company worth 40 million Naira, then her percentage will be 25 percent of the company, which is 250 000 shares.
This 250 000 shares will be issued freshly to Mrs C.
This means that the 250 thousand shares will not be removed from the initial 1 million shares, but will be issued afresh to Mrs C.
So the total issued shares of the company will be worth 1,250,000 shares in total.
While Mr. A’s percentage will be 37.5% = 500 thousand shares
Mr. B’s percentage will be 37.5% = 500 thousand shares
Mrs. C’s percentage will be 25% = 250 thousand shares
The above means that the post money valuation of the Company is now 50 million naira.
So this is how it will work for all subsequent rounds of investment, but with some levels of variation in terms and conditions reached.
One thing is certain, there are a lot of agreements reached before an investor can invest in a company. It is usually a tussle of interests and control.
The start-up doesn’t want to give too much control to the investor and the investor needs a level of control in order to safeguard his investment. Both of them wants to value each other correctly. The investor wants to value the company correctly and not give too much than the company is really worth, while the start-up founders also wants to ensure that it doesn’t give too much equity to the investor than the value he is bringing to the table.
Opatola Victor Esq.
adeopatola@gmail.com
0904 181 5408
