Startups need money to grow, therefore, they have to raise funding. The basic financial instruments for startups are the following:
- You can sell your shares
- You can get a loan
- Or you can use convertibles
If you look at a company: the shareholders are the owners of the company. Every company can print shares and issue them to someone. It doesn’t matter how shares have been issued: if you own 100% of all the shares that there are, then you own 100% of the company. Of course, as you print more and more shares the % of the company per share will steadily go down. If the startup prints new shares and sells them then logically the cash will go into the company that is printing the new shares and has sold them. That’s logical.
However, if an existing shareholder sells his shares for cash to someone else then that cash will go into the pocket of the selling shareholder, and not into the company. That’s logical too. So if your company needs investment cash, then it has to print new shares and find cash buyers for them. As you print shares the % in your company for existing shareholders goes down. That’s called ‘dilution’. You can calculate the valuation of your whole company simply by multiplying the total number of shares outstanding with the value per share in a recent funding round.
Learn more about shares in our video tutorial:
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