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Share Capital Table and Dilution

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:

Pre-Investment

Shareholder Shares Held Percentage
James 100 25%
Robert 100 25%
Kirk 100 25%
Lars 100 25%
TOTAL 400 100%

 The investor wishes to acquire 20% of the company for his investment, so post-investment the share capital position will be as follows:

Shareholder Shares Held Percentage
James 100 20%
Robert 100 20%
Kirk 100 20%
Lars 100 20%
Investor 100 20%
TOTAL 500 100%

 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 investment

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