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. All the shares together represent 100% of the company.
Of course, as you print more and more shares, the % of the company per share will steadily go down. That’s called ‘dilution.’
If the startup prints new shares and sells them, then that cash will go into the company. That’s logical. The company can use the cash to invest in growth.
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 the existing shareholders goes down.
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. That’s what someone would likely have to pay to buy all the shares and take the company over.
Learn more about shares in our video tutorial:
We hope you have enjoyed our video tutorial. If you have more questions, contact us at firstname.lastname@example.org.
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