Buying and selling shares in a business through corporatization

Share capital is a term used in business to describe ownership of a company. Share capital usually represents shares of a public company or ownership interests in a private company. Capital is the part of a company that is owned by shareholders (or owners) and has a value that can be sold or exchanged for cash or other assets.

Capital can also refer to the value of the company itself, which is the sum of all its assets minus all its liabilities. A company's equity is the difference between its total assets and total liabilities. It is also called share capital or equity.

In most cases, equity represents an ownership interest in a company. Shareholders have certain rights, such as the right to vote, receive dividends, and the right to receive assets in the event of liquidation of the company. The value of equity depends on the company's performance, meaning it can increase or decrease over time depending on the success of the business.

When companies need to raise capital, they can do so by selling shares. This means that they sell part of their stake in the company in exchange for cash or other assets. This is often done through an initial public offering (IPO), where a large number of shares are sold to the public in exchange for cash.

Selling shares can be an attractive option for companies because it allows them to raise large sums of money quickly. However, this also comes with some risks and disadvantages that need to be taken into account.

Tips for a stock seller

First, when companies sell shares, they lose control of management because they are giving away shares of their company to investors. Second, if a company does not perform well and its share price falls, investors may be reluctant to invest further and may abandon their investment altogether. Finally, there are significant costs associated with issuing and selling shares, including legal fees, accounting expenses and marketing expenses.

Advantages of selling shares

Selling shares in a company can often be a tempting option to raise funds, but it's important to weigh the advantages and disadvantages before going down this route. In some cases, this can be a great way to raise needed funds, as well as the potential to build strong relationships with investors who can offer valuable support and insights. However, there are also some pitfalls to taking this route that you should consider before making this decision.

The main advantage of selling shares of a company is that it generates capital without requiring the payment of any principal or interest. This can be a great way to get the money you need to grow without the added burden of debt. In addition, it is usually much easier to raise funds through equity than through debt financing because investors are often less risky and may be more inclined to invest if they believe in the company's potential.

Another benefit of selling shares is that it can open up new opportunities for strategic partnerships and collaborations. Attracting investors to a business can lead to the emergence of fresh ideas and new perspectives on the development of the company. This can be especially useful when trying to enter new markets or establish new business relationships. They can continue for quite some time after the investment, providing ongoing support and guidance to the business.

Another potential benefit of taking this route is that it can help increase company awareness. Attracting well-connected and reputable investors can help improve a company's image and increase its chances of being viewed as a more attractive option by potential clients or partners. Additionally, having experienced investors on board can provide access to valuable contacts and experience that can be beneficial to a company's growth prospects.

Finally, selling company stock can help create an employee incentive structure. When employees own shares in a company, they are more likely to stay with the company longer and make it a priority because they will be a part of its success. This can lead to increased employee loyalty and engagement, which can benefit the company in the long run.

Disadvantages of selling shares

There are also some potential downsides to consider before making this decision to sell shares of the company.

When you issue new shares, the value of existing shares decreases accordingly. This means that existing shareholders have a smaller ownership stake in the company and their voting rights are weakened. Additionally, if new investors do not align with the vision and goals of existing shareholders, it can lead to conflict and tension between them.

Another potential downside to selling shares is that it may be difficult to find investors willing to buy your company. If it doesn't have a proven track record and a solid business plan, you'll have a hard time convincing investors to buy into your vision. This means that it may take longer than expected to secure the necessary capital.

Additionally, when you sell shares of your company, you give up some control over the future direction of the company. New investors will likely want to have a say in how the company is being run and may push for decisions that don't align with your vision and goals. This can be problematic if you are trying to maintain control over your business and its operations.

Finally, when you sell shares of your company, you are actually giving away a portion of its future profits. New investors will expect a return on their investment and will likely receive a share of future profits. Your own ROI will be reduced accordingly.

Before making a decision, it is important to weigh the potential disadvantages against the potential advantages.

Tips for buying shares

Equity transactions typically involve buyers being offered some or all of the transaction value in the form of equity in the seller's business. When you are offered capital, it is important to understand that not all capital is created equal.

«Best» capital

These are senior shares with a high level of liquidity. If you can negotiate the seller's most senior series of preferred stock, you're doing well. If you are offered these shares with some additional contract terms that increase their liquidity, then perhaps you should bite the seller's hand off for the deal.

This better capital will allow you, the shareholder, to receive the proceeds from the sale of the business before holders of less valuable shares.

Preferred shares are senior to common stock in a sale of a business, where preferred stockholders must get their preference back, usually the original investment amount, before common stockholders receive anything.

Special contractual additions, such as investment rights and voting rights, not granted to holders of common shares, — another attribute of the “best” capital. In addition, co-sale decision rights and first refusal rights in the event of a sale will also increase the value of your equity.

«Good» capital

Good promotions — These are stocks that offer some of the above benefits, but perhaps not all. This capital is superior to common stock, has no special contractual rights, but is less attractive than the “best” shares. shares that you could receive in exchange for all or part of your business.

«Bad» capital

These are the stocks you should avoid in stock trades if at all possible. If the seller offers you shares of common stock without any special rights, you may want to decline the deal. This share may have limited liquidity because it is subject to contractual restrictions, like all other common shares.

Here are some points to pay attention to in the promotions offered to you:

• Liquidity — this means you are more likely to receive a payout on the stock than holders of other common shares of the same company. Often, if a business is sold, a certain amount of the proceeds goes first to the holders of premium shares.
• Unique contract rights — Look for contract addenda that will give you a say in deals, future funding rounds, joint sales. In addition, the bonus will be the right to sell shares to investors during the next round of financing.
• Right of redemption by event or time — this is the right to force the acquirer to buy back your shares at a certain, pre-agreed price at a future date.

How to negotiate a better equity deal

Choose the right time

Analysts believe that one of the best times to close an equity sale deal is after the selling company has completed its Series A financing, but before the closing of its Series B. This way, you maximize your chances that There will be a liquidity event in the near future that will result in you receiving real money for the shares you purchased.

Find out everything you can about the business of the selling company

This is beyond doubt. You need to make sure that you are knowledgeable about the business in which you are considering taking a stake. Does the founder have a track record of success? Does it have healthy cash flow? Can the business attract investment and/or buyers in the near future?

Request all necessary information in writing

You must be provided with written information about how much of the company you will own and all the terms of the transaction. If the buyer refuses to provide information about the deal, the contract, or even their financial situation, it may be time to walk away from the deal.

As a buyer, an equity-financed acquisition may not seem particularly lucrative. In fact, a stock deal allows you to benefit from the selling company's future success and from the higher profit margin of the combined business. This can be very profitable if you are not in a hurry for money and manage to negotiate the right terms and contract.