Lesson 4: Equity Management Features

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.

Initial State

At the initial state of equity management:

• No shareholders exist.
• The owner owns 100%.
• The company's valuation is zero.
• No stocks are available.

Event 1: Capitalization

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.

Event 2: Initial Shares Release

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.

Event 3: Share Split

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)

Event 4: Shares Purchase

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)

Summary

Here are the events in summary:

1. Capitalization - One-time event where initial funding is proposed, leading to company valuation.
2. Initial Shares Release - One-time event for launching initial shares into the market.
3. Share Split - Increases the amount of shares.
4. Shares Purchase - Involves buying or selling, affecting the company's stake holdings.

Thank you for following along. See you in the development section!