Incorporation Issues: Shares, Paid-Up Capital and Dilution

One big problem that most first-time entrepreneurs grapple with is how to determine the number of shares, how to divide them and later on, the mechanics of increasing paid-up capital and what exactly is dilution. Find out how to calculate dilution of shares when a new shareholder comes into the picture.

If your company has 100 shares and someone has 5.5% equity stake in the company, how many shares does this person get? 5.5? This is not possible. In this case, it might be better to have 1000 shares so that (s)he gets 55 shares instead.

Too little shares might mean that when you have more shareholders with various equity stakes in the company, the division of shares might become messy (too many fractional shares!).

Paid-Up Capital is essentially the amount of money the founders and investors have put into the company. Once given to the company, the money becomes “paid-up capital” and belongs to the company for its usage.

This also means that you have to keep proper records that the money has indeed gone into the company’s bank account. Keep proper accounting records and save your bank statements.

Increasing the paid-up capital of a firm usually also means the issuance of new shares. The person putting in capital into the firm is buying a stake in it. This could be increasing his original stake or becoming a new shareholder altogether.

When you issue new shares, you dilute the rest of the original stakes in the company. Here is a simple example:

• John and Marie found Jam Pte Ltd in Jan 2009.

o John gets 30 shares which equals 30% of the company
o Marie gets 70 shares which equals 70% of the company.
o This means a total number of 100 shares.

• Later in the year, Aileen goes to John and Marie and wants to invest in Jam Pte Ltd.
• All of them agree that Aileen will invest a certain amount of money for 50% of the company.

o Jam Pte Ltd issues 100 new shares to Aileen.
o Jam Pte Ltd now has 200 total shares (John: 30, Marie: 70, Aileen: 100).
o Which works out to John having 30/200 = 15%, Marie having 70/200 = 35% and Aileen having 100/200 = 50% of the company.

Here is a table that better shows the dilution process:



Now, wasn’t that simple? Just modify the different percentages accordingly. Here is a simple formula for you to use:



*If you need a recommendation to help you incorporate your company or for company secretarial services drop us a message.

Image courtesy of Lordcolus.

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Related posts:

1. Incorporation Issues: Company Secretary And Fees
2. Incorporation Issues: Registered Office Address
3. Incorporation Issues: Private Limited Company

Tags: Calculate shares, Dilution, Incorporation, Incorporation Issues, Paid-Up Capital