Increasing Share Capital of a Corporation
A discussion of shareholder agreements and shares is not complete without a discussion on how to increase the share capital of a corporation. There are two ways this can be achieved; shareholders can sell their stock or the corporation can issue new shares, to be purchased either by existing shareholders or by new investors.
Issuing New Shares
If a corporation wants to create new shares, it can increase the capital of the company by “allotting’ new shares. This usually occurs when a corporation wants to raise additional funds without requiring existing shareholders to sell any of their stock. However, issuing new shares will dilute the percentage of ownership and control of the current owners.
Increasing Share Capital
New shareholders can purchase stock in a corporation at any point after incorporation. Existing shareholders can transfer or sell their shares to a new shareholder. If the articles of the shareholder’s agreement confer pre-emptive rights to the existing shareholders, they should first waive these rights so that the new shareholder can purchase the shares.
Third-party shareholders who wish to invest in a start-up are ordinarily venture capitalists or angel investors. Often small family businesses will rely on the investment from family and friends, a small business loan, or crowd-sourcing before turning to venture capitalists or angel investors. As the latter two constitute the lion’s share of investment opportunities, let’s look at these more closely.
What are Angel Investors?
Angel investors are high net worth individuals who choose to invest their personal funds in a start up in the hopes of a healthy return on their investment. Typically, an angel investor will invest anywhere between $25,000 and $100,000 although this can be more or less. It is also possible for multiple angels to invest as a group, in which case the investment will be larger, typically more than $750,000.
Angel investors purpose are to act as a source of money for the purposes of growth and scale of early stage businesses, not as advisers that act in the role of management, although this is possible if the owners request it.
What is a Venture Capitalist?
Venture capitalists, on the other hand, are comprised of a group of professional investors. Their capital will come from high net worth individuals, corporations, endowments, insurance companies, pension funds and foundations. These investors are known as Limited Partners (LPs), who typically invest large amounts of money, on average $7 million or more. The venture fund is structured as a limited partnership governed by partnership agreement covenants, of finite life (usually 7–10 years). It pays out profit sharing through carried interest (about 20% of the fund’s returns).
General Partners (GPs) are venture capitalists who help in the management of the fund. They are integral to the raising and management of the venture funds, set and make investment decisions, and help their portfolio companies exit. They have a fiduciary responsibility to their Limited Partners.
Venture capitalists, then, have a role in building a successful company. With their know-how and expertise, they offer real value in terms of setting the strategic focus, recruiting senior management, and act as a sounding board to CEOs with an eye to ensuring rapid development and growth.
Often, venture capitalists and angel investors will receive preferred shares in the start-up in exchange for their financial investment.
Contact a lawyer at Kalfa Law today to discuss how you can set strategic goals for your corporation and how best to get there by increasing share capital of your corporation.
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There are two main ways to increase the share capital of a corporation: either by issuing new shares, which will raise fresh capital for the corporation, or existing shareholders can transfer or sell their shares to another purchaser.
Angel investors are high net worth individuals who choose to invest their personal funds in a start up in the hopes of a healthy return on their investment. Angel investors are typically there as sources of money for purposes of growth and scale of early stage businesses, not as advisers that act in the role of management, although this is possible if the owners request it.
Venture capitalists are comprised of a group of professional investors. Their capital will come from high net worth individuals, corporations, endowments, insurance companies, pension funds and foundations. Venture capitalists are willing to risk investing in such companies because they can earn a massive return on their investments if these companies are a success. VCs experience high rates of failure due to the uncertainty that is involved with new and unproven companies.
-Shira Kalfa, BA, JD, Founder
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.