Hi. Welcome to lesson number four on Equity Management Features. In this lesson, we will focus on:
Key features during the development phase
How these features work
Their importance
Let's dive into the details by explaining how these features work, step by step.
At the initial state of equity management:
No shareholders exist.
The owner owns 100%.
The company's valuation is zero.
No stocks are available.
The first significant event is capitalization. Here’s how it happens:
A shareholder proposes funding, e.g., offering 10,000 euros for 10% of the company.
The owner retains the remaining 90% of the company.
This investment changes the company's overall valuation to 100,000 euros.
This is calculated as follows:
If 10% is worth 10,000 euros, 100% would be 100,000 euros.
Note: In real-life scenarios, the 10% would likely convert to stocks.
Next is the initial shares release, another one-time event. Here’s the process:
The company releases shares to the market.
Suppose we release 10,000 shares, representing 100% of the company.
The allocation would be:
The owner (90%) = 9,000 shares
The shareholder (10%) = 1,000 shares
The total shares would now be 10,000.
The share split event can occur for various reasons, such as decreasing share price or increasing liquidity. It works as follows:
Suppose the company's valuation is 100,000 euros and we have 10,000 stocks.
Applying a split factor of 2 would increase the amount of shares to 20,000.
The new allocation:
The owner = 18,000 shares (previously 9,000)
The shareholder = 2,000 shares (previously 1,000)
Lastly, we have the shares purchase event, which involves buying or selling stocks. For instance:
Suppose the shareholder buys 1,000 shares from the market.
This purchase increases the shareholder's stake from 10% to 15%.
The new stock allocation:
Shareholder = 3,000 shares (previously 2,000)
Here are the events in summary:
Capitalization - One-time event where initial funding is proposed, leading to company valuation.
Initial Shares Release - One-time event for launching initial shares into the market.
Share Split - Increases the amount of shares.
Shares Purchase - Involves buying or selling, affecting the company's stake holdings.
Thank you for following along. See you in the development section!