Question

In: Accounting

Explain the difference between fully diluted and primary shares. You invest $10,000 to start a company...

Explain the difference between fully diluted and primary shares.

You invest $10,000 to start a company and issue yourself 100,000 shares. A year later you raise

$1,000,000 from Firm A according to a pre-money valuation of $5,500,000. Following that

investment, some of your friends are interested in participating and you issue them 2% of the

company when they invest $200,000.

What was Firm A’s price per share?

What is the post-money after Firm A’s investment?

Assuming your friends do invest, how many shares would they be issued?

What is the new price per share according to your friends’ investment?

How many shares are issued in total?

For the friend round:

Pre-money: ______________

Post-money: _____________

After the friend round, what does the cap table look like?

Solutions

Expert Solution

Explain the difference between fully diluted and primary shares.

The primary shares are only those shares that are issued by the company and authorized to issue.

Primary share are only those shares that are actually been issued as of date.

Fully diluted shares

Fully diluted shares shows that number of equity shares that will be outstanding if all the sources of conversion such as convertible loans and share warrants are converted to equity.

Fully diluted shares as compared to the primary shares also includes those shares that are not yet issued or due. They also includes those shares that will be due if the convertible loans and share warrants are converted in equity .

_________________________________________________________________________________

for calculations please see below table in picture

What was Firm A’s price per share?--> $55

What is the post-money after Firm A’s investment?-->$5,600,000

Assuming your friends do invest, how many shares would they be issued?-->2036

What is the new price per share according to your friends’ investment?-->55

How many shares are issued in total?-->103,854

For the friend round:

Pre-money: 5600000

Post-money: 5800000

after the friend round, what does the cap table look like?


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