Is it necessary for owners or founders to give up shares in an IPO?
Suppose my company values $100 million. Now in an IPO If shares worth $30 million are issued @ $10/share. So, the owners/founders own 70% of the company.
What if the founders/owner wanted to raise $30 million by not giving up the $100 million they own. I mean shares worth $30 million are issued @10/share and the valuation of the company increases to $130 million. But now the founders or owners own 100/130=76% of the company.
Could this be done in an IPO?Am I missing something?
Yes, you're missing something although idk why you had to get m.s. for it.
Correct me if I'm wrong but you can't just hold on to the $100mm, it's a value, not cash-in-hand. So if there are 10mm shares, you can either sell 3mm of them to raise $30mm, or you can issue more shares - even if the owners now owned 76% or whatever of the shares, the dilution effect on the price of having more shares would balance it out.
In an IPO, the issuance could be primary(more shares are issued, effectively diluting the existing equity) or secondary(current shareholders sell their shares to new investors). Often times, an IPO includes both, but there isn't necessarily a benchmark for the proportion of each.
Where you're going wrong is assuming that the pie gets bigger during an IPO, when in reality its just that the pie is divided into more pieces. If a company had 10m shares outstanding at $10/share(market cap = $100m) but wanted to raise another $20m in gross proceeds(won't worry about the nuances related to costs here for the simplicity of calculation), they would need to issue another 2m shares making the total # of shares outstanding at 12m. If market cap stayed the same, the value of each share becomes 100/12 = $8.33/share.
This is one of the answers I got at stack exchange: "The owner's share depends entirely on how much of the business they choose to sell. If the business is worth $60M and they want to raise $20M for themselves, then that means selling 33% of the company. If they want to raise $20M for the business as well, then that means selling half the company and retaining ownership of the other half, which is now worth $80M because of the cash infusion."
But, If the company wants to issue another $20m in gross proceeds, won't the market cap increase by the same amount ?though the share price remains the same @10/share. This will definitely decrease the percentage of ownership in the company for existing shareholders but the absolute value of their equity remains the same. But if the market cap remains the same it will decrease the absolute value and the percentage as well. Moreover, @8.33/share with 2m shares they won't be able to raise $20m. Is this logic correct?
I'm confused about why you are confused... If the $60 million dollar company itself wants to raise $20 million, then the theoretical market cap increases to $80 million but the dollar value of each share is still the same (if it was originally $10, it should be $10) - however each share's percentage ownership of the entire company is decreased.
Idk what you mean in the last part "But if the market cap remains the same it will decrease the absolute value and the percentage as well. Moreover, @8.33/share with 2m shares they won't be able to raise $20m. Is this logic correct?" Why are you asking this? The market cap does not remain the same after a primary offering - the market cap goes up (theoretically, though market conditions and investor sentiments and drive stock prices down and make the market cap lower than it's pre-offering value)
They need to dilute or give up part of their ownership share (or at least somebody does). If the IPO raises the value of their stake by upping the valuation they can actually have a greater nominal equity share in the company in terms of value, but their ownership stake will still be diluted.
So if the company is valued at 100M and the founders own 70% equity, their stake is worth 70M. If when they float the IPO, there is sufficient demand at a higher valuation such that they can sell 10% of their ownership share for 20M let's say, then the total valuation has now gone up to 200M. Their ownership stake is now 60% but it's worth 120M instead of 70M because the valuation has changed.
They could also just dilute the stake and issue new shares, and the same could be true; even though the ownership stake is less in percentage terms, the higher valuation provided by the new issue could raise their total value.
Change in Shareholder's Equity when Founder sells shares in an IPO? (Originally Posted: 09/05/2014)
Hey Guys,
Wondering how Shareholder's Equity changes when a current shareholder sells part of their holdings in an IPO. For example, Jack Ma is set to sell $800mm of his stake in the company. I imagine that Ma will be receiving that cash, and not the company. Would this decrease Shareholder's Equity? And what would balance this on the assets side - as I see it, cash would go up by the amount that the company sells in new shares.
Also, for a non-public company going public, what are the general effects on the SE side?
SB's for good responses! Thanks for your help.
What you're looking for is the difference between primary and secondary shares. In an IPO primary shares are issued directly by the company, which would dilute existing shareholders and increase the book equity of the company (equity increases by the cash raised). Secondary shares are sold by existing shareholders such as Jack Ma, YHOO, Softbank in the case of Alibaba. It's basically the same as if you sold a share of Alibaba except at a much larger scale.
Exactly what Nabooru said. In very simple terms, let's say you owned one share of Company X. Now you sell that share to me for $5. I give you $5, you get $5. Company X couldn't care less, because that transaction has no impact on Company X.
Jack Ma is doing the same thing, only at a much larger scale, and he's selling his shares to institutional investors, so that does impact the company (shareholder base is always a concern for publicly traded companies, especially given current activist environment). At the end of the day, Jack Ma is getting the cold card cash, not his company.
When an existing shareholder (Founder or not) puts up a portion of his equity for sale, it is usually termed as a vendor sale. Vendor sales have no effect on the share capital or shareholder equity. This generally holds regardless of a private company transaction, or a private > public company transition.
When SE decreases (for whatever reasons; e.g. Decrease in retained earnings), your assets have to reduce accordingly (as opposed to increasing) in order for your financial statements to balance.
In your scenario, it is most likely a vendor sale that is occurring. I think you may be referring to an example whereby the SE increases due to the company undergoes pure fundraising and the share capital is enlarged. In this case, the Founder (and existing shareholders) do not get any cash in exchange for the new shares issued to the incoming investor. Instead, the existing shareholders equity holdings are diluted. Through this, both SE and cash will increase accordingly.
Since I'm a beginner I'm a little confused.Correct me where I'm wrong. I'll start from the beginning. I am the owner/founder a firm XYZ pvt ltd. I've invested $1M in my company and got the company registered as sole proprietorship company. (Here I've a doubt, when I get my company registered do they issue shares at that time?I mean do sole proprietorship companies have shares?) Fast forward one year, my company does well and now have assets worth $2M(with zero liability and the profit being re-invested). Now I want to expand my company and raise money by going public.I reach out to an investment bank where they evaluate the worth of my company(I don't know how do they evaluate? Will they evaluate my company based on the assets I own worth $2M ? And what does it mean by valuation? Does it mean that If I sell my company today I'll get that much amount of money?) Suppose the investment Bank values my company at $3M. Now what's the next step? Can Someone explain it to me by using the example. Thanks.
I really don't understand what's so hard to understand. You can literally read up guides after doing simple google searches. **I don't know how do they evaluate? ** By looking at similar companies/ intrinsic valuation / precedent transactions
**Will they evaluate my company based on the assets I own worth $2M ? **
Yes, and the revenues/expenses (EBIDTA values) and many other things to value a company.
And what does it mean by valuation?
Literally, you are valuing a company. Say you have a used car and someone gives you a valuation of $10,000. You can expect to sell that car for about $10,000
Does it mean that If I sell my company today I'll get that much amount of money?
Yes
"Suppose the investment Bank values my company at $3M. Now what's the next step?"
Search up sell-side M&A and read about it
When you go public you stop being 100% private?
Yes
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