It is important to agree early in the investment process the percentage stake the investor is to receive in your company in exchange for his investment. Any equity investment made, will have a dilutive effect on the existing members’ shareholdings, so it is best to bottom this out early in the process so that all members know what their shareholding will be post-investment. The easiest way to achieve this is by preparing a share capital table which shows the pre and post-investment share capital position.
Please note that the free MBM Seed Investment Term Sheet deals with these points and we recommend that you use a term sheet like this in all investment deals.
Here is a basic example of how dilution of shareholdings operates:
The investor wishes to acquire 20% of the company for his investment, so post-investment the share capital position will be as follows:
On the basis of the above example, each of the existing shareholders will see their shareholding drop from 25% to 20% by virtue of the investment.
Please also bear in mind that if your company receives additional investment in future, unless something is agreed to the contrary, any new investment will have a further dilutive effect on all the shareholders, including your original investor.
HELPFUL TIPS ON SEED INVESTMENT DEALS
EIS and SEIS - Tax Relief
Check Your Company Books Are Up To Date
Use Heads of Agreement for Main Deal Terms
Share Capital Table and Dilution
Agree the Process and Documents to be Used
Choose an Appropriate Adviser
Dealing with Indebtedness
Updating the Company’s Records Post-Investment
Document Indexing and Signing Requirements
Scots Law or English Law
Read our briefing note on how to run an early stage seed investmentDownload
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