Issue link: https://htpgraphics.uberflip.com/i/246991
Funding Section 5 If Newco wishes to allocate 22 new shares to an option pool (to create the equivalent of 10%), then the new shareholdings, once those shares have been issued, will be as follows: Figure 3 Investor Limited (100 Shares) 45% Research Institution (30 Shares) Dr Red (35 Shares) 13.5% 15.8% Professor Green (35 Shares) 15.8% Option Pool (22 Shares) 9.9% 100% Newco Limited Ultimately it is more worthwhile for you to have a small piece of a large pie than having a large piece of a small pie which has no value at all, which could be the outcome if you resist further investment because of the dilution effect. It will also throw up the question of the valuation of the company at each new funding with terms such as "pre new money valuation" and "post new money valuation" being used by potential investors. Settling on a valuation will obviously be important as the company will be seeking to extract as much money from the Investor in return for giving away as little of the equity as possible. The Investor, on the other hand, will be arguing for as large a percentage shareholding as possible. There will be many complex factors involved in fixing on an actual valuation (not least the question of what the Investor is prepared to pay for the shares!) and the company will need to seek the advice of corporate financiers at such time. Remember also that these funds will be for the company to finance specific projects, to recruit sales and marketing personnel or for application generally in its development and not to be returned into the hands of the shareholders. The benefit will come to the shareholders when the company has grown to the stage where an exit is possible and they can hopefully sell their shares at a considerable profit. 35