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.
Read our briefing note on how to run an early stage seed investmentDownload
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