Issue link: https://htpgraphics.uberflip.com/i/246991
Funding Section 5 If a new investor, Investor Limited, wishes to acquire 100 new shares in Newco, the new shareholdings will be as follows: Figure 2 Investor Limited (100 Shares) 50% Dr Red (35 Shares) Research Institution (30 Shares) 15% 17.5% Professor Green (35 Shares) 17.5% 100% Newco Limited In other words, the percentage shareholdings of the original shareholders will also have gone down. They will have each suffered dilution. The question for the original shareholders, however, is what benefits the new investment will bring in return for them suffering the dilution of their shareholdings. Will the investment, for example, provide the injection of funds which the company needs to take the next step in its development? You must also remember that the company may require a number of rounds of further financing in order for it to develop and grow until it reaches the stage where an exit can be contemplated. These rounds are classed by letter, ie "A" round, "B" round, "C" round etc. This simply means the various stages reached, ie first round, second round, third round etc, as the spin-out progresses and achieves its predetermined targets. Typically the size of funding is larger at each subsequent round and the shares issued for these rounds may carry different rights. Such further rounds of financing will inevitably lead to further dilution. It is good practice to reserve a certain number or percentage of shares for key people who are yet to join the spin-out, who will help drive the spin-out towards success. An equivalent to about 10% of the issued shares of the company is commonplace. It is called an "option pool" and when the shares, which have nominally been allocated to such a pool, are allotted it too will lead to dilution. 34