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Thursday, July 15, 2010

Understanding Paid Up Capital

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Number of Shares
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If the company has 100 shares and someone has 5.5% equity stake in the company, how many shares does this person get? 5.5? This is not possible. In this case, it might be better to have 1000 shares so that (s)he gets 55 shares instead.

Too little shares might mean that when the company have more shareholders with various equity stakes in the company, the division of shares might become messy (too many fractional shares!).

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Paid-Up Capital
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Paid-Up Capital is essentially the amount of money the founders and investors have put into the company. Once given to the company, the money becomes “paid-up capital” and belongs to the company for its usage.

This also means that the company have to keep proper records that the money has indeed gone into the company’s bank account. Company needs to keep proper accounting records and save its bank statements.

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Increasing Paid-Up Capital
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Increasing the paid-up capital of a firm usually also means the issuance of new shares. The person putting in capital into the firm is buying a stake in it. This could be increasing his original stake or becoming a new shareholder altogether.

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Dilution
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When management of the Company issues new shares, it dilutes the rest of the original stakes in the company. Here is a simple example:

Satish and Pankaj found Satpan Pvt Ltd in Jan 2010.

o Satish gets 30 shares which equals 30% of the company

o Pankaj gets 70 shares which equals 70% of the company.

o This means a total number of 100 shares.

Later in the year, Varunesh goes to Satish and Pankaj and wants to invest in Satpan Pvt Ltd.

All of them agree that Varunesh will invest a certain amount of money for 50% of the company.

o Satpan Pvt Ltd issues 100 new shares to Varunesh.

o Satpan Pvt Ltd now has 200 total shares (Satish: 30, Pankaj: 70, Varunesh: 100).

Hence, now it works out to Satish having 30/200 = 15%, Pankaj having 70/200 = 35% and Varunesh having 100/200 = 50% of the company.