Company Equity

[leesider29]

Can someone please shed some light for me on the ins and outs of a company you have equity in going public?

Also if it doesn't go public what are the ways you can make money from it besides being sold to a private investor or if the company is gradually bringing down its debts?

Any insight into this would be appreciated.

 

[Brendan Burgess]

Is this a practical question or an academic essay question?

If it's a practical question, you might give some more detail.

 

[leesider29]

Hi Brendan, it's a practical question, I have the option of taking equity in a large software firm that is run by venture capitalists who bought it last year, of course those who had equity then became overnight millionaires due to the price it was sold at. It is thought they will try to flip it again in another 4 years and are investing quite heavily at the moment in new projects, but it has also been aired that they might go public. The equity in company would have to be kept for a minimum of 3 years so I suppose my questions are what happens to the equity in the following scenarios:

1. They go public
2. They sell the firm on
3. Neither of the above by the time the 3 years is up and instead they have written down a lot of their debt

Hope this helps, thanks

 

[Brendan Burgess]

Hi leesider

The original and primary purpose of investing in a company is to get a share in the profits in the form of dividends. So if it's a profitable company with a future, you should get paid dividends. There is no need for the company to be sold or for the company to go public to get a good return on your investment.

This should be your basic approach. Is this a good investment? Is the company profitable? What will the dividend payments be on my shares?

As it's a developing software company, the plan is probably not to pay dividends but to reinvest the profits in the growth of the company. Or they may use the profits to repay the debt.

As a minority shareholder in a private company, you are in a very weak position. You can go to the AGM, the decisions will probably have already been made about dividend policy etc.

If you need to sell your shares, you probably won't be able to.

If the company is sold on, you will get the same price for your shares as everyone else.

If the company is floated, it is likely that you will be able to sell your shares in the market or at flotation.

If it's a significant amount of money, you may need to pay for professional advice.

Is this offer being made to you individually or to a group of employees?

 

[leesider29]

Hi Brendan,

Thanks for the info much appreciated. This offer is being made to me only due to changing circumstances and as an enticement, senior management have availed of it previously and continue to do so. The company in question has a very large market share and are long established in their country of origin (not Ireland). They were publicly listed around 2008 but venture capitalists bought it and it was delisted, they flipped it last year for 3 times the amount they bought it for to venture capitalists that would be well known throughout the world.

Very niaeve question coming up, when a company is floated does the value of equity normally rise i.e. when converted to ordinary shares? Most people will have heard of great stories where people have made a killing through something like this. Btw if they were to go public again it would be in London or NY and not their country of origin.

Thanks again

 

[Brendan Burgess]

when a company is floated does the value of equity normally rise i.e. when converted to ordinary shares?

Generally speaking, but it's only generally speaking, the shareholders float a company when they feel that they will get a good return on their initial investment. So the early shareholders tend to do very well.

I would be a bit worried that VCs flpped it last year after only three years to other VCs. It would suggest that the new VCs might have paid a full price for it.

There are no guarantees. If you are paying more than the shares are actually worth, then you can lose money on them when it is flipped again.

Is there any chance that they would give you share options? If the value today is €20 per share and they give you an option to buy at €20, then it's a one way bet for you. If the price falls, you don't exercise the options. If the company is floated or flipped, then they would have to buy out your options.

I don't really know who would advise you on this issue. An accountant would have to know the business you are in.

Brendan

 

[leesider29]

Thanks for all the info Brendan, gives plenty of food for thought, I like the share options idea, will have to have to see if that is a goer!