I was asked the following question recently and I hope my answer satisfies the reader. If any of you do have specific questions for me, please do not hesitate to contact me.

You put in £10,000, company is then valued at £100,000, so your stake is worth 10%.

After several rounds of financing, company is now valued at £1,000,000.

Do you:

a) still have 10% of the company, your stake now worth £100,000?

Or

b) now have 1% of the company, the value of your original investment?

This is a good question and I can say that it took me ages to get my head round this. As an entrepreneur and an investor it is important you understand this.

Let’s take two examples – starting off with you owning 10% of the business above. It is easier to think of this in terms of the number of shares in issue. There are 100,000 shares in issue at £1 a share. So the investor owns 10,000 shares.

In example one, the business is doing well but needs to raise more money. The business now is making a profit of £50,000 a year and gets valued at £1m (pre-money valuation). The company raises £100,000 by issuing a further 10% of new shares. To raise this extra money, the company issues 10,000 new shares at £10 a share. The post valuation is £1.1m. The investor’s shares are worth £100,000 before and after the fund raise but in terms of % ownership

1. Before s/he had 10,000 shares out of 100,000 (ie 10%)
2. After s/he has 10,000 shares out of 110,000 (ie 9.09%) which is 10% less than the shares held before.

In example two, the business is not doing well and needs to raise a further £100,000 at a pre-money valuation of £50,000 (the company is not doing very well and in today’s climate, asset prices have collapsed – so this is realistic). This means that the shares pre-money are priced at £0.50 each. To raise £100,000 therefore, the business needs to issue 200,000 shares at £0.50. Before and after the event the investor’s shares are worth £5,000. But in terms of % ownership

1. Before s/he had 10,000 shares out of 100,000 (ie 10%)
2. After s/he has 10,000 shares out of 300,000 – (ie 3.33%)

I hope this helps as an explanation. Most businesses will have around three or four rounds of finance. As I may have mentioned in a previous blog, it is important not to get carried away with the ownership % as an investor, but what your shares are actually worth.

The other point to bear in mind is that when you are raising money, you are issuing new shares or selling shares that have been authorized but not issued; you are not selling existing shares that belong to someone. In that instance, the money raised, belongs to the person that has sold the shares not the company.

Feedback as always welcome

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