Can an owner give some of his equity back to the company so that it can be used to raise more money?
If an owner has 50% of the company, and the remaining 50% is spoken for by friends and family, is it possible for the owner to "voluntarily" give some of his equity back to the company (at no charge) so that it can be used to raise more money? For example, he says he's willing to reduce his ownership to 40% so that 10% can be used to raise more money. If he's receiving zero dollars personally, would there be any personal or company tax implications?
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usually new shares are issued. The effect is that the existing shares are diluted - but generally held shares don't get "sold" in the scenario I think you are describing – Tim J 13 years ago
1 Answer
The 50% founder shuold currently have an equal number of shares to the 50% "friends and family". If the goal is to reduce the 50% founder's equity to 40% while keeping the "friends and family" block at 50% then you would need to issues shres to the friends and family block as you issue them to the investors.
Example:
At Time Zero
- Founder: 10,000 shares
- Friends/Family: 10,000 shares divided between them
This means the founder has 50% equity (10,000/20,000). If you want to reduce the founder's equity by 10% you need to increase the number of outstanding shared accordingly: 10,000/.4 = 25,000 shares. 2500 of those new shares will go to the new investor and 2500 will go to the friends/family.
Once Investment is acquired
- Founder: 10,000 shares
- Friends/Family: 12,500 shares
- Investor: 2500 shares
Now your equity split is 40%, 50%, 10%.
Done.
