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I've recently started trying to understand how these dilution events occur. I was wondering if you could better explain what happened in this case so I could fu

by campnic 14y ago

I've recently started trying to understand how these dilution events occur. I was wondering if you could better explain what happened in this case so I could further my understanding.

ChuckMcM 14y ago
Its fairly straightforward. There is 'money' and there is 'stock'. Money funds day to day operations, pays salaries, power bills etc. Stock determines ownership, and in most corporations governance. Now day to day you spend money and ideally you also get revenue. If the revenue that comes in for any given month/quarter is more than the money going out that month/quarter then you are 'operationally cash flow positive' meaning that other than something like a big lawsuit or a promissory note coming due or some big financial event you can keep working and the lights on. It doesn't necessarily mean you can hire anyone or 'grow' or fund a PR campaign. Then there is stock which represents ownership in the company, there can be multiple classes of stock which convey different rights, and there can be corporate bylaws which change how decisions are made while private vs public, but for the simple case we'll assume that 1 to 1, one share of stock is worth 1/(total-stock) of the company and exerts an equivalent amount of control. When you make a decision for the company you at the board level you effectively 'vote your stock' when you vote. If 50.1% of the stock votes one way that is the way the decision goes. So lets consider a couple of scenarios: Lets say the Company is : 1,000,000 shares Investor A - 10% stock (100,000 shares) Investor B - 15% stock (150,000 shares) Investor C - 15% stock (150,000 shares) Founder A - 25% stock (250,000 shares) Founder B - 25% stock (250,000 shares) (everyone else in the company) - 10% remaining stock. Now the two founders, if they agree they can get their decisions ratified by the board with one additional investor voting with them. The 'value' of the company is price-per-share * total shares. So lets say this company was valued at $10M so each share is 'worth' $10. Now you need more money (revenues aren't covering it) so you try to sell more stock which is going to change the numbers around. Lets say you need $10M for the next 24 months and none of the investors want to invest any more money. You've got a crisis. But if you are also independently wealthy you can say "I'll put in the $10M but I'll take 2 million shares." So the 'totals' after that transaction are 3 million shares in total (up from 1 million) and as a strict percentage we've got: 3,000,000 shares Investor A - 3.3% stock (100,000 shares) Investor B - 5% stock (150,000 shares) Investor C - 5% stock (150,000 shares) Founder A - 8.3% stock (250,000 shares) Founder B - 75% stock (2,250,000 shares) (everyone else in the company) - 3.3% remaining stock. Founder B now has 'sole control' because they have enough stock to make any decision, vote their own stock, and have that decision be ratified.
- mtoddh 14y ago
  So in this scenario, does it also mean that the shares are now worth less too? As in they are now worth $3/share ($10M/3,000,000) whereas before they were worth $10?
  - ChuckMcM 14y ago
    Edit: yes the value goes down of the shares, but the calculation 'post money' is $10M + $10M / 3m shares so 6.66 $/share.
  - deleted 14y ago
    [deleted]
  - jfno67 14y ago
    After the new $10M in cash it is $20M/3,000,000, so they are worth $6.66/share
  - andrewcooke 14y ago
    if you re-did the maths with the same guy buying 1,000,000 shares at $10 a share then they'd still end up with a controlling share in the business (and the business would indeed be worth $20M since it was worth $10M before and now has an extra $10M in cash, meaning that shares would still be worth $10 each). so i'm not sure why the original example needed to place an odd value on the newly issued shares. as far as i can tell, it just muddies things. i wrote this on rights issues, which is kind-of related (works through a similar kind of argument, except this time framed so people keep the same fractional shares) - http://acooke.org/cute/EnersisEnd0.html http://acooke.org/cute/EnersisEnd0.html [edit: just fixed url] (i'm no expert, i was just interested in that particular case in the chilean press recently). in short: you don't need to screw anyone over. it can just be that the person putting most money in ends up with most of the ownership. the two key points are: (1) people need to agree on the company's value before; (2) the company gets the cash (and so its value goes up). of course, that cash won't sit in the bank - but it's the company's responsibility (and the investor's hope) that it is spent in a way that increases the value of the company.
- samstave 14y ago
deleted 14y ago
[deleted]

by campnic 14y ago

I've recently started trying to understand how these dilution events occur. I was wondering if you could better explain what happened in this case so I could further my understanding.

ChuckMcM 14y ago

Its fairly straightforward. There is 'money' and there is 'stock'. Money funds day to day operations, pays salaries, power bills etc. Stock determines ownership, and in most corporations governance. Now day to day you spend money and ideally you also get revenue. If the revenue that comes in for any given month/quarter is more than the money going out that month/quarter then you are 'operationally cash flow positive' meaning that other than something like a big lawsuit or a promissory note coming due or some big financial event you can keep working and the lights on. It doesn't necessarily mean you can hire anyone or 'grow' or fund a PR campaign. Then there is stock which represents ownership in the company, there can be multiple classes of stock which convey different rights, and there can be corporate bylaws which change how decisions are made while private vs public, but for the simple case we'll assume that 1 to 1, one share of stock is worth 1/(total-stock) of the company and exerts an equivalent amount of control. When you make a decision for the company you at the board level you effectively 'vote your stock' when you vote. If 50.1% of the stock votes one way that is the way the decision goes. So lets consider a couple of scenarios: Lets say the Company is : 1,000,000 shares Investor A - 10% stock (100,000 shares) Investor B - 15% stock (150,000 shares) Investor C - 15% stock (150,000 shares) Founder A - 25% stock (250,000 shares) Founder B - 25% stock (250,000 shares) (everyone else in the company) - 10% remaining stock. Now the two founders, if they agree they can get their decisions ratified by the board with one additional investor voting with them. The 'value' of the company is price-per-share * total shares. So lets say this company was valued at $10M so each share is 'worth' $10. Now you need more money (revenues aren't covering it) so you try to sell more stock which is going to change the numbers around. Lets say you need $10M for the next 24 months and none of the investors want to invest any more money. You've got a crisis. But if you are also independently wealthy you can say "I'll put in the $10M but I'll take 2 million shares." So the 'totals' after that transaction are 3 million shares in total (up from 1 million) and as a strict percentage we've got: 3,000,000 shares Investor A - 3.3% stock (100,000 shares) Investor B - 5% stock (150,000 shares) Investor C - 5% stock (150,000 shares) Founder A - 8.3% stock (250,000 shares) Founder B - 75% stock (2,250,000 shares) (everyone else in the company) - 3.3% remaining stock. Founder B now has 'sole control' because they have enough stock to make any decision, vote their own stock, and have that decision be ratified.

mtoddh 14y ago
So in this scenario, does it also mean that the shares are now worth less too? As in they are now worth $3/share ($10M/3,000,000) whereas before they were worth $10?
- ChuckMcM 14y ago
  Edit: yes the value goes down of the shares, but the calculation 'post money' is $10M + $10M / 3m shares so 6.66 $/share.
- deleted 14y ago
  [deleted]
- jfno67 14y ago
  After the new $10M in cash it is $20M/3,000,000, so they are worth $6.66/share
- andrewcooke 14y ago
  if you re-did the maths with the same guy buying 1,000,000 shares at $10 a share then they'd still end up with a controlling share in the business (and the business would indeed be worth $20M since it was worth $10M before and now has an extra $10M in cash, meaning that shares would still be worth $10 each). so i'm not sure why the original example needed to place an odd value on the newly issued shares. as far as i can tell, it just muddies things. i wrote this on rights issues, which is kind-of related (works through a similar kind of argument, except this time framed so people keep the same fractional shares) - http://acooke.org/cute/EnersisEnd0.html http://acooke.org/cute/EnersisEnd0.html [edit: just fixed url] (i'm no expert, i was just interested in that particular case in the chilean press recently). in short: you don't need to screw anyone over. it can just be that the person putting most money in ends up with most of the ownership. the two key points are: (1) people need to agree on the company's value before; (2) the company gets the cash (and so its value goes up). of course, that cash won't sit in the bank - but it's the company's responsibility (and the investor's hope) that it is spent in a way that increases the value of the company.
samstave 14y ago

deleted 14y ago

[deleted]