Post money shareholdings
Peppe Santaro • March 12, 2019
A client asked me the following question recently. “I have 7,500 ordinary shares in issue and I want to give a new investor enough shares so that, post issuance, he holds 8.5% of the company. How many shares do I need to give my new investor?”
Lots of lawyers’ first instinct would be to say, “Talk to your accountant, she’ll tell you“. However, I believe that understanding capital structures from the ground up is an essential part of providing legal advice to high growth start-ups. So we rolled up our sleeves and worked how many shares this new investor needed to get (697 after rounding, in case you’re interested).
If you’re just transferring shares from one shareholder to another, the calculation couldn’t be simpler. It gets a little more tricky however to work out how many new shares need to be allocated to someone to leave them with a specified percentage after those new shares are allocated. My client and I got there by trial and error in a few minutes with a calculator but we both felt there had to be a better way.
That set me to thinking that there must be a simple formula for calculating this (and of course there is). On the off chance that this might be useful to someone else in the future (please let me know on Twitter or email if it is!), here goes:
N = (A1*A2)/(1-A2), where:
N is the number of new shares to be issued,
A1 is the total number of shares in issue immediately prior to the new issuance, and
A2 is the percentage of the total ordinary equity the new investor is to have after the new shares are issued (expressed as a decimal so 5% becomes 0.05, 20% becomes 0.2 and – like in the example above – 8.5% becomes 0.085).
(Tip: You should be able to copy and paste the formula above into Excel or your preferred alternative spreadsheet program)
Enterprise Ireland has been running its Competitive Start Fund (CSF) program since 2011. Over time the program has been incrementally improved and refined but companies approaching the program experience many of the same issues time after time when it comes time to engaging with a solicitor to draw down the investment awarded by Enterprise Ireland. This short post aims to offer some constructive pointers to companies as to what to do and when to do it. 1. Tax registration: If you are thinking of applying for CSF funding, make sure you have registered with the Revenue Commissioners and have been issued with a tax registration number. Most companies (or their accountants) do this as a matter of course on incorporation but occasionally at Venture Legal Services we come across companies that are not yet tax registered. 2. Tax Clearance: Next on the list (and still on the subject of tax), apply for a general tax clearance certificate from the Revenue Commissioners. All businesses are entitled to a tax clearance certificate if their affairs are up to date. You can find out more about tax clearance certificates and apply online on the Revenue Commissioners’ website. You cannot draw down money from Enterprise Ireland until you have shown them your tax clearance certificate so before you go any further, click on that last link (a new window should open) and when you are finished reading this go and apply. A tax clearance certificate is free, good to have on file and will save you time later on. 3. Bank Account: Again, most companies we deal with at Venture Legal Services already have a bank account set up but if you don’t, get on to that straight away. It’s another key condition of CSF drawdown that your solicitor vouch to Enterprise Ireland that the company has drawn down matching funding of not less than €5,000 in exchange for the issue of shares. Without a company bank account that will simply be impossible. 4. Memorandum & Articles: Get a copy of your memorandum & articles of association, ideally also in editable soft-copy. Enterprise Ireland sometimes ask for some changes to be made to the articles of association around the time of CSF completion and you will streamline that process greatly by having these documents all lined up and ready to go. Even if you can’t get them in an editable format, have a clean and clear copy available and to hand. 5. Get a solicitor: You will need a solicitor in good standing with the Law Society to issue certain key confirmations on the company’s behalf to Enterprise Ireland. The Law Society will give you access to a list of all solicitors in the country via their website but not all solicitors are familiar with the CSF process. We suggest – by recommendation, referral or otherwise – that you find a solicitor who is familiar with the process and who will make it easy for you. If you are reading this, you’re already three steps ahead of the rest! Tip – Any solicitor who has done a few of these before should be able to offer you a fixed price for the service because the work involved is highly predictable. 6. Identity verification documents: Because you need to use a regulated professional to draw down CSF funding from Enterprise Ireland, that professional is going to need to verify the identity of the directors and shareholders of your company. It is good practice to have a scanned copy of your passport or driving licence on hand and to be able to lay your hands on a recent utility bill or other similar proof of address. You are going to need to give them to your adviser so best to have them on standby and ready to go. 7. Statutory books: On incorporation, you should have received a hardbound A4 combined company register (unless your company’s registers are being maintained electronically) from your company formation agent (or accountant, solicitor etc.). Whether your statutory books are maintained electronically or in the more traditional way, you are going to be making some new entries in the register of members when it comes time to issue shares in relation to the €5,000 matching funding and the €25,000 first tranche of Enterprise Ireland’s investment. With that in mind it is best to have these registers on hand, ready to be written up with the details of the share issuance. I hope this is helpful. Again, if you don’t have tax clearance already don’t hesitate – apply now. And if you have any thoughts, questions or comments please email or use the comments field below. As ever we would be delighted if you chose to follow us on Twitter, LinkedIn or Google+
Two months ago we received word that Peppe Santoro, Venture Legal Services had been nominated for an Irish Internet Association Net Visionary Award. We were put forward in the category of Best Professional Services Provider. The tagline that the IIA add to the category is “someone who really gets it“. We liked the tagline as it sums up how we try to do business and hopefully this means we have happy clients as a result. Past winners of Net Visionary Awards have included Jerry Kennelly of Tweak.com, Mark Little (now of Storyful), Michele Neylon of Blacknight, Dylan Collins of Fight My Monster, Jolt (and others) and Eamon Leonard of EngineYard (in 2012) so the award is one of the most significant on the Irish technology scene. A number of our clients and friends were also nominated this year so we felt in good company. There were two steps to the judging process: an independent adjudication by a panel of judges and a public vote. We couldn’t do anything beyond just doing what we already do to influence the judges’ vote but it seemed to make sense to reach out to clients and others who know the firm well to ask for their support. The response was tremendous and quite humbling. Via email, Twitter and on LinkedIn we got outstanding support and really positive feedback. Many people took the time to cast their vote. To all of them, we are very thankful. So in summary this is really just a big thank you to everyone who voted. We’ll do our best to keep on delivering fixed fee advice as often as we can and great value always. We wouldn’t be in business were it not for the support and custom of our clients and we will always do our best to serve. If you’re reading this and we are not already connected, we would be delighted if you chose to connect using any of the means below.
