Post money shareholdings

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)