AANZ’S NEW CAPITAL RAISING TEMPLATES – Calculating the ‘Issue Price’ per share

from Avid Legal’s Murray Whyte

The new AANZ Term Sheet clarifies how the issue price per share is usually calculated. Even some experienced investors, companies, and entrepreneurs have struggled with the concept under the NZVIF templates, so it is worth clarifying this in more detail here.

The issue price per share for a capital raising round is usually derived from an agreed company valuation on a “pre-money” basis.  That is, the company’s valuation immediately before the investors pay their investment amount to the company.

The issue price per share is then calculated by dividing this pre-money valuation by the number of existing shares in the company (again, before the investment is made), on a “fully diluted basis”.

A “fully diluted basis” ordinarily means treating all unexercised options, convertible loans, and other securities, whether currently issued or otherwise reserved by the Company, as if they have been converted into shares.

Most typically, “fully diluted basis” will include treating all convertible securities as if they’ve been converted. However, the template also provides some flexibility to negotiate away from the general understanding of this term depending on the context of the investment.

Two examples have been provided below that illustrate how this can play out in practice.  Both are based off the following hypothetical investment round:

  • $1,000,000 investment;
  • the company’s agreed pre-money valuation is $3,000,000;
  • there are 3,000,000 existing shares (before the investment is made); and
  • the company has reserved 300,000 shares for an Employee Share Scheme / ESOP (and I’ll presume that no shares have actually been issued under any scheme).

Example: Fully diluted basis

Most of the time “fully diluted basis” will include shares in any Employee Share Scheme / ESOP.  This would mean the issue price would be calculated as follows:

i.e. (if rounded to 5 d.p.):

Therefore, the investors will be issued 1,100,000 shares for their $1m investment, and the relative percentage ownership of the company post-investment would be:

  • Existing Shareholders:  3,000,000 shares (73.17%)
  • New Investors:  1,100,000 shares (26.83%)

For the sake of completeness, if the 300,000 shares reserved for the Employee Share Scheme / ESOP were subsequently fully issued, then:

  • Existing Shareholders:  3,000,000 shares (68.18%)
  • New Investors:  1,100,000 shares (25%)
  • Share Scheme Employees:  300,000 shares (6.82%)

As you can see, the dilutive effect of the Employee Share Scheme / ESOP is shared amongst existing shareholders on a pre-investment basis when the Employee Share Scheme / ESOP pool is included in the meaning of “fully diluted basis”.

Example: Fully diluted basis excluding Employee Share Scheme / ESOP

Agreeing to move away from the general understating of “fully diluted basis” will result in a marginally higher issue price and a lower number of shares being issued to investors, despite using the same pre-money valuation.

Under my hypothetical investment, by fully excluding the Employee Share Scheme / ESOP the issue price becomes $1 per share, with the investors being issued 1,000,000 shares for their investment.  This results in a relative percentage ownership of the company post-investment of:

o    Existing Shareholders: 3,000,000 shares (75%)

o    New Investors: 1,000,000 shares (25%)

If the 300,000 shares reserved for the Employee Share Scheme / ESOP were subsequently fully issued, then:

o    Existing Shareholders:  3,000,000 shares (69.77%)

o    New Investors:  1,000,000 shares (23.26%)

o    Share Scheme Employees:  300,000 shares (6.98%)

By excluding the Employee Share Scheme / ESOP from the meaning of “fully diluted basis” the dilutive effect is shared amongst both existing shareholders and investors.

There are, of course, many other ways to negotiate in this area. The examples above just an illustration of two ways to go about it. If in doubt, seek advice from someone experienced in growth company capital raising.

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