Module 1 Introduction to Stock Markets

Chapter 4

The IPO Markets – Part 1


4.1 Overview

The initial three chapters have set the background on some of the basic market concepts that you need to know. At this stage it becomes imperative to address a very basic question – Why do companies go public?

A good understanding of this topic lays down a sound foundation for all future topics. We will learn new financial concepts during the course of this chapter.


4.2 Origin of a Business

Before we jump ahead to seek an answer as to why companies go public, let us spend some time figuring out a more basic concept – the origins of a typical business. To understand this concept better, we will build a tangible story around it. Let us split this story into several scenes just so that we get a clear understanding of how the business and the funding environment evolves.


Scene 1 – The Angels


Let us imagine a budding entrepreneur with a brilliant business idea – to manufacture highly fashionable, organic cotton t-shirts. The designs are unique, has attractive price points and the best quality cotton is used to make these t-shirts. He is confident that the business will be successful and is all enthusiastic to launch the idea into a business.

As a typical entrepreneur he is likely to be hit by the typical problem – where would he get the money to fund the idea? Assuming the entrepreneur has no business background he will not attract any serious investor at the initial stage. Chances are, he would approach his family and friends to pitch the idea and raise some money. He could approach the bank for a loan as well but this would not be the best option.

Let us assume that he pools in his own money and also convinces two of his good friends to invest in his business. Because these two friends are investing in the pre-revenue stage and taking a blind bet on the entrepreneur they would be called the Angel investors. Please note, the money from the angels is not a loan, it is actually an investment made by them.

So let us imagine that the promoter along with the angels raises INR 5 Crore in the capital. This initial money that he gets to kick start his business is called ‘The Seed Fund’. It is important to note that the seed fund will not sit in the entrepreneur’s (also called the promoter) personal bank account but instead sits in the company’s bank account. Once the seed capital hits the company’s bank account, the money will be referred to as the initial share capital of the company.

In return for the initial seed investment, the original three (promoter plus 2 angels) will be issued share certificates of the company which entitles them ownership in the company.

The only asset that the company has at this stage is the cash of INR 5 Crs, hence the value of the company is also INR 5 Crs. This is called the company’s valuation.

Issuing shares is quite simple, the company assumes that each share is worth Rs.10 and because there is Rs.5 crore as share capital, there have to be 50 lakh shares with each share worth Rs.10. In this context, Rs.10 is called the ‘Face value’ (FV) of the share. The face value could be any number. If the FV is Rs.5, then the number of shares would be 1 crore, so on and so forth.

A total of 50 lakh shares is called the Authorized shares of the company. These shares have to be allotted amongst the promoter and two angels plus the company has to retain some amount of shares with itself to be issued in the future.

So let us assume the promoter retains 40% of the shares and the two angels get 5% each and the company retains 50% of the shares. Since the promoter and two angels own 50% of the shares, this allotted portion is called Issued shares.

The shareholding pattern of this company would look something like this:

Sl No Name of Share Holder No of Shares %Holding
1 Promoter 2,000,000 40%
2 Angel 1 250,000 05%
3 Angel 2 250,000 05%
Total 2,500,000 50%

Please note the balance of 50% of the shares totaling 2,500,000 equity shares is retained by the company. These shares are authorized but not allotted.

Now backed by a good company structure and a healthy seed fund the promoter kick starts his business operations. He wants to move cautiously, hence he decides to open just one small manufacturing unit and one store to retail his product.


Scene 2 – The Venture Capitalist


His hard work pays off and the business starts to pick up. At the end of the first two years of operations, the company starts to break even. The promoter is now no longer a rookie business owner, instead, he is more knowledgeable about his own business and of course more confident.

Backed by his confidence, the promoter now wants to expand his business by adding 1 more manufacturing unit and a few additional retail stores in the city. He chalks out the plan and figures out that the fresh investment needed for his business expansion is INR 7 Crs.

He is now in a better situation when compared to where he was two years ago. The big difference is the fact that his business is generating revenues. The healthy inflow of revenue validates the business and its offerings. He is now in a situation where he can access reasonably savvy investors for investing in his business. Let us assume he meets one such professional investor who agrees to give him 7 Crs for a 14% stake in his company.

The investor who typically invests in such an early stage of business is called a Venture Capitalist (VC) and the money that the business gets at this stage is called Series A funding.

After the company agrees to allot 14% to the VC from the authorized capital the shareholding pattern looks like this:

Sl No Name of Share Holder No of Shares %Holding
1 Promoter 2,000,000 40%
2 Angel 1 250,000 05%
3 Angel 2 250,000 05%
4 Venture Capitalist 700,000 14%
Total 3,200,000 64%

Note, the balance 36% of shares is still retained within the company and has not been issued.

Now, with the VC’s money coming into the business, a very interesting development has taken place. The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. With the initial valuation of 5Crs, there is a 10 fold increase in the company’s valuation. This is what a good business plan, validated by a healthy revenue stream can do to businesses. It works as a perfect recipe for wealth creation.

With the valuations going up, the investments made by the initial investors will have an impact. The following table summarizes the same…

Sl No Name of Share Holder Initial Shareholding Initial Valuation Shareholding after 2 Yrs Valuation after 2 Yrs Wealth Created
1 Promoter 40% 2 Crs 40% 20 Crs 10 times
2 Angel 1 05% 25 Lakhs 05% 2.5 Crs 10 times
3 Angel 2 05% 25 Lakhs 05% 2.5 Crs 10 times
4 Venture Capitalist 0% -NA- 14% 07 Crs -NA-
Total 50% 2.5 Crs 64% 32 Crs

Going forward with our story, the promoter now has the additional capital he requires for the business. The company gets an additional manufacturing unit and a few more retail outlets in the city as planned. Things are going great; the popularity of the product grows, translating into higher revenues, The management team gets more professional thereby increasing the operational efficiency and all this translates to better profits.


Scene 3 – The Banker


Three more years pass by and the company is phenomenally successful. The company decides to have a retail presence in at least 3 more cities. To back the retail presence across three cities, the company also plans to increase the production capacity and hire more resources. Whenever a company plans such expenditure to improve the overall business, the expenditure is called ‘Capital Expenditure’ or simply ‘CAPEX’.

The management estimates 40Crs towards their CAPEX requirements. How does the company get this money or in other words, how can the company fund its CAPEX requirements?

There are few options with the company to raise the required funds for their CAPEX:

  1. The company has made some profits over the last few years; a part of the CAPEX requirement can be funded through the profits. This is also called funding through internal accruals
  2. The company can approach another VC and raise another round of VC funding by allotting shares from the authorized capital – this is called Series B funding
  3. The company can approach a bank and seek a loan. The bank would be happy to tender this loan as the company has been doing fairly well. The loan is also called ‘Debt’

The company decides to exercise all three options at its disposal to raise the funds for Capex. It plows 15Crs from internal accruals, plans a series B – divests 5% equity for a consideration of 10Crs from another VC and raises 15Crs debt from the banker.

Note, with 10Crs coming in for 5%, the valuation of the company now stands at 200 Crs. Of course, this may seem a bit exaggerated, but then the whole purpose of this story is to drive across the concept!

The shareholding and valuation look something like this:

Sl No Name of Share Holder No of Shares %Holding Valuation
1 Promoter 2,000,000 40% 80 Crs
2 Angel 1 250,000 05% 10 Crs
3 Angel 2 250,000 05% 10 Crs
4 VC Series A 700,000 14% 28 Crs
5 VC Series B 250,000 05% 10 Crs

Note, the company still has 31% of shares not allotted to shareholders which are now being valued at 62 Crs. Also, I would encourage you to think about the wealth that has been created over the years. This is exactly what happens to entrepreneurs with great business ideas, and with a highly competent management team.

Classic real-world examples of such wealth creation stories would be Infosys, Page Industries, Eicher Motors, Titan industries and in the international space one could think of Google, Facebook, Twitter, Whatsapp, etc.


Scene 4 – The Private Equity


A few years pass by and the company’s success continues to shine on. With the growing success of this 8-year-old, 200 Cr Company, the ambitions are also growing. The company decides to raise the bar and branch out across the country. They also decide to diversify the company by manufacturing and retailing fashion accessories, designer cosmetics and perfumes.

The CAPEX requirement for the new ambition is now pegged at 60 Crs. The company does not want to raise money through debt because of the interest rate burden, also called the finance charges which would eat away the profits the company generates.

They decide to allot shares from the authorized capital for a Series C funding. They cannot approach a typical VC because VC funding is usually small and runs into a few crores. This is when a Private Equity (PE) investor comes into the picture.

PE investors are quite savvy. They are highly qualified and have an excellent professional background. They invest large amounts of money with the objective of not only providing the capital for constructive use but also place their own people on the board of the investee company to ensure the company steers in the required direction.

Assuming they pick up a 15% stake for a consideration of 60Crs, they are now valuing the company at 400Crs. Let’s have a quick look at the shareholding and valuations:

Sl No Name of Share Holder No of Shares %Holding Valuation (in Crs)
1 Promoter 2,000,000 40% 160
2 Angel 1 250,000 05% 20
3 Angel 2 250,000 05% 20
4 VC Series A 700,000 14% 56
5 VC Series B 250,000 05% 20
6 PE Series C 7,50,000 15% 60
Total 4,450,000 84% 336

Please note, the company has retained a 16% stake which has not been allotted to any shareholder. This portion is valued at 64 Crs.

Usually, when a PE invests, they invest with an objective to fund large CAPEX requirements. Besides they do not invest in the early stage of a business instead they prefer to invest in companies that already have a revenue stream, and are in operation for a few years. The process of deploying the PE capital and utilizing the capital for the CAPEX requirements takes up a few years.


Scene 5 – The IPO


5 years after the PE investment, the company has progressed really well. They have successfully diversified their product portfolio plus they have a presence across all the major cities in the country. Revenues are good, profitability is stable and the investors are happy. The promoter, however, does not want to settle in for just this.

The promoter now aspires to go international! He wants his brand to be available across all the major international cities; he wants at least two outlets in each major city across the world.

This means the company needs to invest in market research to understand what people like in other countries, they need to invest in people, and also work towards increasing the manufacturing capacities. Besides they also need to invest in real estate space across the world.

This time around the CAPEX requirement is huge and the management estimates this at 200 Crs. The company has few options to fund the CAPEX requirement.

  1. Fund Capex from internal accruals
  2. Raise Series D from another PE fund
  3. Raise debt from bankers
  4. Float a bond (this is another form of raising debt)
  5. File for an Initial Public Offer (IPO) by allotting shares from authorized capital
  6. A combination of all the above

For sake of convenience, let us assume the company decides to fund the CAPEX partly through internal accruals and also files for an IPO. When a company files for an IPO, they have to offer their shares to the general public. The general public will subscribe to the shares (i.e if they want to) by paying a certain price. Now, because the company is offering the shares for the first time to the public, it is called the “Initial Public Offer’.

We are now at a very crucial juncture, where a few questions need to be answered.

  1. Why did the company decide to file for an IPO? In general why do companies go public?
  2. Why did they not file for the IPO when they were in Series A, B and C situation?
  3. What would happen to the existing shareholders after the IPO?
  4. What do the general public look for before they subscribe to the IPO?
  5. How does the IPO process evolve?
  6. Which of the financial intermediaries involved in the IPO markets?
  7. What happens after the company goes public?

In the following chapter we will address each of the above questions plus more, and we will also give you more insights to the IPO Market. For now, hopefully you should have developed a sense of how a successful company evolves before they come out to the public to offer their shares.

The purpose of this chapter is to just give you a sense of completeness when one thinks about an IPO.

Key takeaways from this chapter

  1. Before understanding why companies go public, it is important to understand the origin of business
  2. The people who invest in your business in the pre-revenue stage are called Angel Investors
  3. Angel investors take the maximum risk. They take in as much risk as the promoter
  4. The money that angels give to start the business is called the seed fund
  5. Angel’s invest relatively a small amount of capital
  6. Valuation of a company simply signifies how much the company is valued at. When one values the company they consider the company’s assets and liabilities
  7. Face value is simply a denominator to indicate how much one share is originally worth
  8. Authorized shares of the company are the total number of shares that are available with the company
  9.  The shares distributed from the authorized shares are called the issued shares. Issued shares are always a subset of authorized shares.
  10. The shareholding pattern of a company tells us who owns how much stake in the company
  11. Venture Capitalists invest at an early stage in business; they do not take as much risk as Angel investors. The quantum of investments by a VC is usually somewhere in between an angel and private equity investment
  12. The money the company spends on business expansion is called capital expenditure or CAPEX
  13. Series A, B, and C, etc are all funding that the company seeks as they start evolving. Usually higher the series, higher is the investment required.
  14. Beyond a certain size, VCs cannot invest, and hence the company seeking investments will have to approach Private Equity firms
  15. PE firms invest large sums of money and they usually invest at a slightly more mature stage of the business
  16. In terms of risk, PE’s have a lower risk appetite as compared to VC or angels
  17. Typical PE investors would like to deploy their own people on the board of the investee company to ensure business moves in the right direction
  18. The valuation of the company increases as and when the business , revenues and profitability increases
  19. An IPO is a process by means of which a company can raise fund. The funds raised can be for any valid reason – for CAPEX, restructuring debt, rewarding shareholders, etc


  1. When you say the “company is valued at”, you refer to the company’s balance sheet or the notional value based on its future returns?

    • Karthik Rangappa says:

      Because the company is not listed yet, the valuation is based on the transaction value of private investors (Angels, Ventures, PE etc).

  2. svk1994 says:

    This is injustice man. Apple is the father of all these, just see the youtube video for Steve Jobs life. I’d prefer if the example of Apple is entered into the examples of internationally successful companies. Nevertheless, it is the most powerful company on Earth.

  3. saxena.000 says:

    Hi kartihk kindly edit the line … “Note, the company still has 31% of shares not allotted to shareholders which are now being valued at 62 Crs”
    The correct is : “Note, the company still has 29% of shares not allotted to shareholders which are now being valued at 58 Crs “

  4. vinaybirur says:


  5. Karthi says:

    Karthik, what is mean by floating the bonds? again is it like debt offering @ some % interest ?

  6. Shaunak says:

    Hey Karthik,
    Nice article. One edit if i may point out, After PE Series C funding @15% stake, PE owns 750,000 shares (15% of Authorized Shares) and total no of Issued shares comes to 4,200,000 (84 % Issued). Keep up the good work !

  7. SATEESH KUMAR says:

    Your way of explanation is excellent and I suggest you to release a book with the same contents which will be a boon to small investors with no knowledge in markets

    • Karthik Rangappa says:

      Thanks Sateesh for the kind words. There is still a lot of work pending in Varsity, Zerodha is working really hard to put up the best possible content here in the first place. I guess book is still a distant dream 🙂

    • Omkar Patkar says:

      Sateesh is right…i totally agree…your way of tutoring and narrating is simply fantabulous….keep up the good work.
      I will recommend my zerodha varsity to my friends… 🙂

      • Karthik Rangappa says:

        Thanks Omkar. Please do help us reach out to more people and have them educated on concepts related to stock markets!

  8. sushil 12 says:

    Thank you keep it up Good work indeed.

  9. shiladitya says:

    does the face value also increases ?????

  10. shiladitya says:

    on which circumstances & how it changes the whole scenario????

    • Karthik Rangappa says:

      For example in a Reverse Stock Split – the company may want to decrease the number of shares outstanding in the market and hence increase the FV from lets say Rs.5 to Rs.10.

  11. Harshit Agarwal says:

    Does not the promoter of the company own all the shares after allotting the required number to the angel investors?
    Why does the company retain some shares instead of the promoter owning everything that’s left?

    • Karthik Rangappa says:

      It is not necessary that the promoter holds back all share. Usually companies reserve some for later use such as allotting to employees, attract funds etc.

      • Harshit Agarwal says:

        Does that mean that he cannot allot all the shares to himself?
        And what if he allots the shares to himself and distributes it as and when required. Does that invite any trouble?

        • Karthik Rangappa says:

          In fact he can keep it for himself and many choose to do it that way. But if one can structure it in such a way where some of the shares are not allotted and kept in reserves for future use, then it will save a lot of headache.

          • DEEPENDER SINGH DEV says:

            i would love to know that if a promoter hold all the shares left after distribution to angel, VC and PE then what kind of trouble happend to promoter?
            if you ask me the share of company has a face value and he is getting it for nothing so in the worse case scenario he would get more than face value and whenever needed for ipo issue or raising extra money he can sell his shares immediately

            please clear this doubt of mine
            and thanks to give us such amazing website content on stock market

          • Karthik Rangappa says:

            Honestly there are so many variations that are possible, what we have put up is just one of the possibilities, the idea here is to give you a sense of how things pan out before IPO.

  12. Manasa says:

    Hello sir ,
    Can you kindly edit the line under Scene 3 – The Banker…”the company still has 29% of shares not allotted to shareholders which are now being valued at 58 Crs “. The correct line is “the company still has 31% of shares not allotted to shareholders which are now being valued at 62 Crs”.

  13. Kundal Agarwal says:

    sir, If the promoter and angel investors have contributed Rs 5cr and they keep 50 percent shares in company’s name
    And there are profits/loss in whose name will it be apportioned??

    • Karthik Rangappa says:

      That would depend on the payout structuring. For example the company can choose to distribute the profits as dividends. In that case each stakeholder will receive money to the extend of the investment in the company. The balance money can be transferred to the Reserves & Surplus account (in the balance sheet). Check out the FA module, we have explained these things in detail.

  14. Kundal agarwal says:

    thanks, that cleared it
    I really appreciate the work you have put in and for the promt reply.

  15. Nikhil Zelawat says:

    Hi the 2nd scene , after getting 7 cr. is that the further investment is ( 7 cr. + profits from 5 cr original investment. ) ?

    and what is 50 cr is showing ?

    • Karthik Rangappa says:

      7 Crs is new capital infusion into the business, it has nothing to do with the profits. Also, the VS is getting 14% stake in company for his investment of 7Crs, in this scale 100% of the company is valued at 50Crs. Therefore 50 Crs is just the valuation of the company.

      • KASHYAP says:

        Question from newbie…
        1. Who does decide how much % of stake for what amount? And how is it decided?
        If VS agrees to give 7Cr for 7% stake in the company. In that case, valuation of the company would be 100Cr. which means company valuation is doubled for the same amount of investment.
        Is there any formula / rule / regulation to decide this funding-stake relation?
        2. What is meant by valuation? Can this valuation be converted to actual money, if let’s say company is sold out?

        • Karthik Rangappa says:

          This is based on the valuation of the firm. Valuation is the worth of a firm. For example if you own a house in Bangalore, then what is the value of the house? If you say its worth 1Cr (based on the rates in the neighbourhood), then 1Cr is the valuation. Similarly, a company can also be valued based on what it has to offer to investors. Usually for startups, CA’s or Investment Bankers will help in valuation.

  16. Pratap says:

    Dear Karthik, You’ve got great skills of a tutor. Fabulous efforts.
    One clarification pl. In scene 2 the promoters valuation is Rs 20 crores against his initial investment of Rs 4 crores (80% of Rs 5 Crore). Hence, wouldn’t it be more pragmatic to say that wealth created in his case is 5 times of the seed money contributed by him instead of the 10 times being shown. Pl clarify. Regards.

    • Suchetha says:

      Thank you for your query. Please note the promoter’s shareholding is 40% of 5 crores , which is 2 crores. Hence the wealth created has grown 10 times as tabulated against the promoters valuation of Rs. 20 crores .

      • Pratap says:

        Dear Sucheta, if the promoter had contributed only Rs 2 crore, how was the seed fund of Rs 5 crores generated? As I understand, the seed fund comprises of 4 crore of the promoter and 50 lakhs each of Angel 1 & 2 respectively. Accordingly the gain is 4 times. Pl clarify. Regards.

        • Karthik Rangappa says:

          Pratap, you could right here. I was reading through the post again…get a feeling there is a little error somewhere. Will identify and plug it soon. Meanwhile, I hope you got a fair idea on the central theme of the chapter.

          • Pratap says:

            Thanks Karthik. The central theme of the chapter has been aptly covered & I don’t think I have read anything as simplified as this. Kudos!!!

          • Karthik Rangappa says:

            Thanks, good to know that 🙂

          • Narasimhan says:

            Hi, the angels put in 2.5 cr each and get 5% holding each. That means their valuation of the business is 50 cr. So, in the VC fund stage, there is no growth of valuation for them at all. That’s because the valuation is 50 cr at the seed stage itself. Please clarify this point.

          • Karthik Rangappa says:

            Hmm, guess you do have a point. The idea here was to convey how the chain of events lead to IPO. That is the crux, I may have goofed up with the numbers 🙂

    • Karthik Rangappa says:

      Thanks for the kind words Pratap, needless to say there is a small team behind Varsity and the credit goes for all 🙂

  17. krushna says:

    Sir, i didn’t understood the how valuation is done , please help.

  18. srihari says:

    thankyou for the wonderful articles and effort you have put in. All the concepts are put in very easy understandable manner. I did not understand the valuation part. That is when a VC puts some money into the company. How did the valuation of the company double ? Can you please elaborate.

    • Karthik Rangappa says:

      Thanks for the kind words. This is encouraging 🙂

      The money doubled because of VC’s valuation.

      Consider this, you go to a vegetable market and buy 250 GMS of Onions at Rs.18…going by this, how much is the value of 1 Kg of Onion? Simple calculation will give you the answer

      =18/0.25 = 72

      Hence, the valuation of 1 Kg of onion is Rs.72/-

      Likewise, the VS is buying 14% at 5Crs, so how much is 100% of the business?

      = 5Crs / 14%

      =50 Crs.

      • srihari says:

        Thankyou very much karthik…. I am missing a super like button here 😉

      • Keshav Deshpande says:

        Hi Karthik. Initially the valuation of the company was Rs 5cr. At this stage the company had that much balance in their account. After the initial investments the valuation of the company became Rs 50cr. So what about the bank balance now? Thanks and regards.

        • Karthik Rangappa says:

          For that we will have to dig deeper into cashflows 🙂 The idea here was to kind of establish how companies go IPO.

          • Keshav Deshpande says:

            Okay. Got the point.

          • Karthik Rangappa says:


          • Karan patel says:


            Initially the Valuation of the company was Rs 5cr. At this stage the company had that much balance in their account. After the initial investments the valuation of the company became Rs 50cr. But bank balance is somewhat around. 4cr(profit from the previous work operations) .

            Suppose now , promoter thinks to sell the whole company to someone else , he will sell as per valuation ?? Is it so?

            Ie. Newbie will pay 50cr to the promoter and buy the whole company.

            Am i right here or missing something??

            Thank you very much for your articles. Your way of writing is awesome.

          • Karthik Rangappa says:

            Yes, valuation reflects the future business prospects of the company along with its earning potential. This is what you pay for.

  19. Chris says:


    Let us Assume I am the promoter and I have put 8 Cr as my investment . I have two angels who put a seed of 1 Cr each. Hence my valuation is at 10 Cr. Initial issuing of shares at face value of Rs 10 equals 1 crore shares. I as promotor take 40 % while the two angels take 5 % each.

    Coming to my questions, I raise a Series A investor, He values 20 % stake at Rs 10 Crore. Now he buys it and this money goes into the company bank account, the money in the account (say no money has been used ) is at 10 Cr + 10 Cr = 20 Cr. I understand how potentially if I sell my share, the evaluation of my stock would be 20 Cr. Now say I bypass all the other investing stages and issue an IPO where I place the remaining 30 % of shares onto the market. Now say I value this 30 % at 50 Cr and they all get sold, I am able to generate 50 Crs in funding which gets put into my company bank account which now has 20 + 20 + 50 = 90 Cr. From this stage how will I be able to generate more large scale funding?

    • Karthik Rangappa says:

      Chris – After you issue all 100% shares and if you still want to issue new shares for funding then you will have to increase your share capital and create new shares. This happens quite frequently in the corporate world. However when you issue additional shares by virtue of dilution the valuation of the company comes down.

  20. Chris says:

    Ok. So wouldn’t that make shareholders angry? By decreasing the value of their stock?

  21. Prashant says:

    Is there any correlation between seed capital of promotor/angel investors with respect to percentage share they own?

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  25. Sagar G says:

    this is a Very good article gives a good knowledge. My question here is the promoter invests 4.5 lack and 5lack from angels is total value. 5 lack is 100% shares. in this i belive 10%for angel investors(2) and 90% of promoter. in this promoter takes 40% of stocks. when you say company holds 50% of the shares, if they sell 14% of shares at 7 Cr to VC, does that 7 Cr belong to the promoter ? because he is the one invested that money initally.

  26. ved bhagia says:

    dear Karthik,
    in the starting itself i shall like to congratulate you for the enormous job done by you & how informative it is for beginners like us, Kudos !!!!! i would seek to understand the following query :- E.g. seed cap- 10 cr, promoters cap- 6 cr ,2 AI cap- 4 cr. Fv 10 rs Promoter share- 40%, AI share – 5% each . If i was an AI i would have asked for 20% share as my invested value is that . Why should i settle for 5%.

    • Karthik Rangappa says:

      Thanks for the kind words 🙂

      Not sure which part you are referring to however in the example you have quoted the math is simple – out of the 10 Crs, 6Cr comes from promoter (60%), 2 + 2 Cr from 2 AI, hence 20% each.

  27. praneethmendu says:

    admin can I suggest that the meaning of promoter come earlier in the text ? “So let us imagine that the promoter along with the angels raise INR 5 Crore in capital. This initial money that he gets to kick start his business is called ‘The Seed Fund’. It is important to note that the seed fund will not sit in the entrepreneur’s (also called the promoter)”

  28. Hi,
    In the scenario where 2round of VC happens…the wealth increases 40 by times.right?
    So suppose Promoter 2cr – 2*40 = 80cr
    Inv 1 25lcs – 25*40 = 10cr
    VC 1 7 cr. – 7*40 = 280cr?
    where i am going wrong here?

  29. Shyam says:

    First of all , I would like to appreciate you and your team for coming up with great informative content. Keep updating such information and make it available to all.Kudos.

    I have a question on the IPO. Lets say my company is intially valued at INR 1,000 . With a face value of 10, I will have 100 shares. Now Later when my company’s valuation rises to INR 10,000 (based on VC,PE fundings). Is it possible for me to issue more number is shares. My question is what is the process by which a company can issue more number of shares after some period of time.


    • Karthik Rangappa says:

      Thanks Shyam!

      Yes, of course you can issue more shares by means of equity infusion. Meaning you add more capital to the company and increase the share base.

  30. aehsan4004 says:

    1) IN GENERAL APPROXIMATELY HOW MANY IPO ‘s are launched in indian markets every year ?

    2) how much time does it take for a stock to reach secondary market after the IPO ?

  31. praveen says:

    HOW TO BUY IPO IN KITE.ZERODHA.COM, tell me about this in details

  32. gmish27 says:

    Hi Karthik, please enable indexing option file exporting pdf. That would help us to jump between chapters/headings easily.

  33. Mahesh says:

    PE series C should be 750,000 shares to make 15% not 1000,000 shares.
    Thanks for the nice explanation

  34. innovator1 says:

    Hi, How does the valuation increase suddenly from 50 crs to 200 crs? Kindly explain

  35. Rahul Pagare says:

    Can the startups keep any face value they want?? what are the limitations for such values & who sets them??

  36. Vel says:

    Hi karthik, thanks for your answers, i have a question, i have holding and want to place sell order before market open time, because i could not concentrate to sell after market open, is it possible to place sell order before market open? if yes, then please guide me, thanks in advance

  37. Sathish says:

    How is the initial 5Cr funded? what is the contribution by promoters and angel
    As their combined claim is only 50% (the rest being retained by company), does that mean at that point of time thy have invested twice but hold claim for only half that

    • Karthik Rangappa says:

      Guess the origin of that 5 Crs is explained in the chapter itself. 50% of the shares are issued, the rest being authorized for further issuance.

      • sidharth says:

        my doubt is “when company is started 5 crore is initial investment, that entire amount is given by 3 people. why they hold only 50% ? If the remaining 50% is hold by company means who is the owner of that company’s 50%. In that initial stage(scene 1), if that company made 1 crore as profit how it is shared by that people.

        I have very little knowledge in this kind of stuffs…forgive if question is wrong

        • Karthik Rangappa says:

          Authorization and issuance of shares, especially at the initial stages is at the discretion of the company. The balance 50% can be kept under reserves to attract more capital or talent (as the situation would demand).

          • abhishek jain says:

            Hi Karthik,
            Pardon my basic question.
            Initially the promoter and angel investors(2 of his friends) were able to collect Rs 5 crore- I am assuming that they contributed the amount equally. At the face value of Rs 10, the alloted shares are 50 Lacs. You said, promoter keeps 40% equity and the other 2 investors 5% each. This takes to 50% or 2.5 crores worth of equity. Now isnt promoter and angel investors at a loss? they should have their own shareholding double( as per 50 lacs shares)?

          • Karthik Rangappa says:

            Abhishek, its best if you treat this example to get the gist of the matter and not go into actual numbers 🙂

  38. Nishikant says:

    Really good article sir☺
    But i have few doughts ,
    Cant u take company to ipo without involving investors or venture capatalists ???

    And can promoters own 90% of shares and remaining 10% for public ????

    • Karthik Rangappa says:

      SEBI mandates that the promoter holding be less than 75% and not more than that. So 90% is ruled out.

      Yes, you can skip the process of having VCs and other investors before going IPO.

  39. arnab says:

    When we can apply for IPO via zerodha?

  40. vdurp says:

    “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. ”

    How? The total investment is 5+7=12 crore only? how the VC is valuing the entire business at INR 50? Please explain this statement

    • Karthik Rangappa says:

      If 14% of the business is valued at 7Cr, then at this rate 100% of business must be worth 50Cr.

      • divyesh patel says:

        i think his question is:
        when new investor arrives
        he can see the previous investments(fundings) which were 5 crore(initial-seed) and 7 crore , totalling 12 crore..
        then how he would calculate 50 crores … this would be expensive for him
        can’t he keep the previous market cap (decided by the previous funding) and invest based on it as this would be cheaper for him

        • Karthik Rangappa says:

          Yes, that is also possible, Divyesh. In fact, there are many different models based on which VCs/PEs values companies and invest.

  41. Sangam Ghosh says:

    I have a small doubt, you may call it silly. As you have mentioned “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. With the initial valuation of 5Crs, there is a 10 fold increase in the company’s valuation”. How did the valuation change such rapidly? If I may add up initial 5Crs and 7Crs by VC, then it amounts to 12Crs. Did the rest come from revenue generated by the company?

    • Karthik Rangappa says:

      Well, end of the day, valuation is just a perception…you value a company based on what you perceive its worth to be!

  42. Kapil says:

    I have a doubt ie in initial stage total capital was 5cr but allotted share capital was only 3cr .what about remaining 2cr

  43. Sandeep says:

    Great article! Presented in a very simple way.

  44. Renu Bala says:

    Hi, Karthik, Thanks for writing this wonderful article. Kudos to your team efforts behind this all. I have been searching this kind of information all over the internet and nvr evr able to find. But finally, my search ended. Great Great Great Thanks !!! Really appreciate your effort.

    I have one query. As you have mentioned in the article, promoter retains 40% of the shares and the two angels get 5% each and the company retains 50% of the shares. Can you please elaborate the total 5cr cash divided into promoter and angles?. As per math, it is 2cr and 25lakh each fr angel. So where is the remaining 2.5cr cash?? is it in reserves and surplus ? … Also how promoters and angles arrive at 40% and 5% number?? How much promoter and angles have invested initially ?? ..

    • Karthik Rangappa says:

      Renu, thanks for the kind words and I’m really happy to know you liked the content here.

      Let me check for the consistency in number again Renu, its been a while since I have posted this and the number are not on top of my mind… its possible I could have made an inadvertent error.

      Anyway, the remaining shares is assumed to be unsubscribed, and to be issued at a later date.

      • Renu Bala says:

        Hi karthik, please reply me soon. I am waiting for your answer. I need to clarifies all my doubts before investing into stock markets.

        • Karthik Rangappa says:

          Sure, but what is your doubt?

          • Renu Bala says:

            I have one query. As you have mentioned in the article, promoter has 40% of the shares and the two angels get 5% each and the company retains 50% of the shares. Can you please elaborate the total 5cr cash divided into promoter and angles?. As per math, it is 2cr and 25lakh each fr angel. So where is the remaining 2.5cr cash?? is it in reserves and surplus ? … Also how promoters and angles arrive at 40% and 5% number?? How much promoter and angles have invested initially ?? ..

          • Karthik Rangappa says:

            Renu, I have already posted an answer for this. Can you please check?

  45. DEEPAK GOYALabab says:


    I have a question regarding Company’s authorized capital and issued capital. As far as I know, authorized capital is the maximum capital a company can raise at any point of time by all kind of avenues & issued capital is a subset of authorized capital which the company is availing at any point of time. And issued capital is referred for establishing the holding pattern not the authorized capital at any point of time. Here when we are referring that the company has not issued full authorized capital, we are considering that the total capital is less than 100% and the company is retaining 50% (at first level) with itself. I think at any point of time, capital has to be considered at 100% and those people (promoter and angels at first level) have to forgo their shares for inducting someone else into the business.

    Please correct me if I am wrong.

  46. dheeraj says:

    So let us assume the promoter retains 40% of the shares and the two angels get 5% each and the company retains 50% of the shares. Since the promoter and two angels own 50% of the shares, this allotted portion is called Issued shares.
    sir, why not promoter hold 51% to maintain his ownership in company for a long time.
    sir please tell in detail about broad of directors.

    • Karthik Rangappa says:

      Well, thats a possibility and in fact most promoters do that. This is just an example and I took the liberty of structuring it the way I wanted 🙂

  47. NareshS says:

    Hi Karthik
    I was wondering why Promoters and angel investor cannot issue all the authorized capital of 10 crore?
    Having gone through the comments I read that is to attract VC and other investors.

    Can authorized capital not increase when VCs show interest in the business?
    If Yes, why is increasing authorized capital not very encouraging from practical point of view?


    • Karthik Rangappa says:

      Well, its not just to attract VCs and other investors….but also top talent. The problem with increasing the capital is that the number of outstanding share tend to increase and this would affect other ratios. I’d suggest you read the FA module for this.

  48. Gautam says:

    can we say that stock market provides company to get capital, is called ”I.P.O.”

  49. Sandeepvazrapu says:

    Doubt: In the story mentioned above module,
    How much money did each of the angel investor, Promoter actually invest in the seed capital of INR 5 Crs. ?

    Would be glad to have your responses on this query

  50. Suprotim Banerjee says:

    Dear Karthik, I could not understand when 5 cr. of starting capital which came from initial investor (A) & 2 angel investor then the entire 50 lacs share should be distributed to A & 2 angel investor only but how come their share constitutes only 50% . The rest 50% as you mentioned as company’s un-issued authorised share capital , is also funded by A or 2 angel investors only , so how they are not owing the same ?

  51. akshay says:

    How to subscribe to IPO from Kite?

  52. prashant says:

    I think if i bring accountancy here , i can’t tally my balance sheet (perhaps) . The initial capital is 5 crs and how can we assume 50% issued and 50% authorized capital. Cash on the asset side will show up 5crs and issued capital as assumed in the example is 2.5crs. As authorised capital doesn’t form part of balance sheet ( it just for disclosure ) , how are you going to match up both sides. Balance of 2.5crs is premium ?

    • Karthik Rangappa says:

      Prashant, frankly these two chapters are expected to just give a very top level overview, illustrating how a company goes IPO. The whole idea here is to keep it simple and help a lay man understand the ‘IPO behind the scene’. Given that, you will have to overlook the Balance sheet perspective here. In fact there a Module on Fundamental Analysis where we deal with financial statements and valuations in great detail.

  53. Tech101205 says:

    Hi ,
    I just wanna ask a question
    When the VC funds the 7 crs and values entire business as 50crs , what does this mean ?
    Does it mean The actual company value is 50 Cr or he expects it to perform like that over time ?
    I did not understand this valuation part correctly
    The total Investment of company after VC funding is 12 Crs
    then why company gets valued at 50 crs
    Is it just a expectation or what ?

    • Karthik Rangappa says:

      Assume your neighbor has baked a 1 Kg cake with 10 pieces. You walk upto him and request him for a piece for a cake. He in turn ask you to pay for it…you think about it, and pay Rs.25 for 1 piece. He gives you the cake and you happily walk out.

      Now think about it – You paid 25 for 1 peice, given this, how much are valuing the whole cake?

      10 * 25 = 250 right?

      The same thing is happening in the above example.

  54. Chethan K Nataraj says:

    Hi Karthik,

    When a company is bankrupted, who will be paid first? ( AI / VC / BANKS / PE / IPO )
    If you can you mention in the order, that would be great.

    Thank you 🙂

    • Karthik Rangappa says:

      This depends on the ‘Capital Structure’ of the company. General rule is to pay off the debt holders first (again based on the seniority of the debt holders) followed by preferential share holders, and lastly the equity holders.


    sir does ZERODHA is having IPO service?

  56. Raj says:

    just want to know initially the VC valued company at 50crs. On what basis he valued this company.Can he also value this company to 100crs.
    I couldn’t understand the logic behind this.

  57. sankeerth says:

    hello sir,
    1.Is there any logic on how to determine share value(i..e in above example company decided as 10)
    2.Is there any logic how much percent of Authorized shares that a company keep with it for future use

    • Karthik Rangappa says:

      1) Yes. People often use the DCF method. I’ve explained the same in FA module
      2) Depends on the companies foresight into its cash requirements.

  58. AS1362 says:

    I understand that from the seed fund of Rs. 5 Cr., 50% is retained by the promoter and his angel investors and the other 50% is the issued shares.
    1. But actually how much money does the promoter get in the beginning for spending in Plant & machinery etc. ?

    Now, if he gets the total Rs. 5 Cr to actually spend in kick-starting the business, and the shares are considered as just an electronic form of the valuation of the company, then when the promoter is going public,
    2. is he giving 50% of the ownership of the business to the public (considering all 25 lacs of shares sold at FV of Rs.10) ?

    I know the questions are very basic, but I am a beginner in this field.

  59. Ram says:

    I have a question regarding the shares allocation at the time of formation. If the Seed Fund is 5 crs and the shares are split 40% & 5% between the promote & the two angel investors (each), then is it fair to assume that the promoter contributed 4 crores initially & that the two Angel investors brought in 50 lakhs each? Is that how it works?

  60. Adarsh Verma says:

    Who decide the “face value (FV)” of of a share? SEBI, The Promoter and angles itself or who??

  61. Nihar dhote says:

    How the money raised in share market get supplied to company?
    The money invested in the market are frequently exchanged so how the company get the fixed amount of money to get started

  62. Abhinav Singh says:

    How is the actual valuation of the company known to the common investor? You have quoted the example “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs”. In companies account total money at that period of time is 5+7= 12 crore only. So actual valuation is only 12 crore.

    • Karthik Rangappa says:

      12Crs is based on cash available, 50Cr is based on future cash flow. I’d encourage you to read the module on Fundamental Analysis to know more about valuations.

  63. Parveen Kumar says:

    “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. With the initial valuation of 5Crs, there is a 10 fold increase in the company’s valuation. ” Kindly explain in detail how this happened that initially there was 5crore and then additional 7cr .Face value of stock is rs 10 ,How ten fold increase in valuation.

  64. Parveen Kumar says:

    Yupp understood the part,thank you for not replying.It helped to make my Brain work. 14% stare value is 7 crore. Meaning he received 700000 shares(14%) for 7crore. If we calculate 700000 shares value is 7crore and what is value of company all shares i.e. 50lakh shares it is 50crore .So just by investing 7crore for 14% share the man thought this company is worth 50crore but in actual when started it was just 5crore worth .Ten times increase in company valuation. Also face value of share which company alloted was 10 increased to 500 per share after valuation of 50crore

  65. p.shunmugaperumal says:

    please give me some brief details about portfilo management also because your education material all are very easy to understand i beginning to market i see a lot of information about that but i couldnot able to understand about that

  66. p.shunmugaperumal says:

    can a individual person can buy a stock at face value

  67. Sushil says:

    Hey, in the Scene 4- The Private Equity section the shareholding table has a mistake. The 15% holding of the PE-series C comes up to 750000 shares, not 1000000.

  68. Sujeet Vhanawade says:

    hello, another question.
    at initial seed funding, promoter and two angel broker invested 5 Cr. and as the face value of the each share is 10 Rs so there is total 50L shares. out of which only 25L shares are kept by Promoter and 2 Angel Brokers, still 25L shares are not allotted.
    is that means 25L of shares for 5 Crs creates the perception of valuation of company is 10 Crs initially because
    25L shares(50%) = 5 Crs
    then 50L shares(100%) = 10 Crs
    is my understanding is true?

  69. Sujeet Vhanawade says:

    as you said, promoter retained 40% and 2 angel brokers retained 5% shares each.
    does mean that all these 3 initial investers might invested amount proportionate to their share proportion
    eg promoter (40%) = 4 Cr.
    and angel brokers 50 Lacs each makes 5 Crore seed funding?
    or it may be the case where all 3 initial investers might invested equal amount (5 Cr / 3) to raise the seed fund, but promoter retained the 40% stakes and angel brokers only retained 5% stakes each is due to the ownership of “Idea of business” is equally important (here in this case promoter have the ownership of idea of business ) that is why promoter may get more % of shares than the 2 other??

  70. P.shunmuga perumal says:

    Can I buy a stock at face value at portfolio management

  71. P.shunmuga perumal says:

    How to buy foreign stocks
    How to know how many stocks are available in the company

  72. p.shunmuga perumal says:

    can a person residing @ india can trade on jpyusd eurusd pairs

  73. p.shunmuga perumal says:

    a person residing @ india can do oversea stock currency trade

    • Karthik Rangappa says:

      There are few ways, but mostly find them a bit cumbersome. However,you have a ton of opportunities here, why do you want to look outside. This is just my opinion.

  74. Gaurav Pande says:

    I have a zerodha trading account. How can I invest in IPO ?
    Please guide.

  75. archanam says:

    Here I have a question, so once the IPO is declared and public buys it, company gets money. So, once the shares starts trading in secondary market, whether the price of share goes up or down, what difference does it make to company ?

    I suppose it should not matter to company. I mean there is no loss or profit to *company* when the share price changes. Please let me know if this is right.


    • Karthik Rangappa says:

      It does not make any difference to the company. However, shareholders wealth is linked to how the stock price behaves. Further, promoters usually have large shareholding, so their wealth is directly linked to how the stock price behaves.

      • archanam says:

        Thanks Karthik, you explained it nicely.
        I had some question in my mind last time and I forgot which page was that, can we receive mail when our query is answered ?
        As I am registered user anyway, if I could get mail that would be good. Otherwise, its difficult to track which page I asked question 🙂

        • Karthik Rangappa says:

          We had that feature earlier, but for some reasons it has been disabled. Will check with my team about this anyway. Thanks.

  76. Phani Samhth says:

    at each case mentioned above a investor buys some x% share and the total value of the company is altered
    who decides the money for the x% shares for the investor to buy?
    what is the ciriterion of the value of the company at each case?
    if all the investors want their share money back how will they recive money, clearly the assets they have is not enough to compensate the total share value?
    please explain in detail.

  77. Anindya Ghosal says:

    You have one of the most erudite ways of explaining. I hardly come across such complex concepts explained in the simplest of ways, yet, covering the nuances in detail. Very well done, Kudos!

  78. kumar abhishek says:

    Hiee karthik sir,
    Q1) As of now we can,t apply for IPO through zerodha ,from when can we expect zerodha to bring this feature on their platform .
    Q2) There is a restriction of maximum application for applying a ipo how is it determined i mean ,is it like from a single demat account i can make 5 bids in aplication form .
    Q3) In terms of oversubscription of a upcoming IPO how gets the highest priprity in allocation ,if you can ilustrate with an example it would be great.
    Q4) does more oversubscription means it will open with a higher premium on listing day on sensex/nifty ? can we sell it on that day itself if we have got any allocation of the IPO.

  79. manjunath says:

    how does the venture capitalist invest some amount of money and claim proportionate percentage of shares, and as a consequence the company is valued at a different price. what is the connecting link between these 3 activities. i mean on what basis the the venture capitalist invest so much amount of money by claiming some “x %” of shares.

  80. KUMAR ABHISHEK says:

    Sir , Is there any benefit in making 3 bids at the cut off price for 1 lot -in a application of IPO subscription through ASBA if we are expecting to it to be heavily subscribed. Isn’t a application with 1 bid at cut off price is as good as 3 bids at cut off price since we don’t get more than 1 lot in oversubscription ,please clear it .

    Q2)should we bid at the cut off price or at the highest price range for increasing our chances

    • Karthik Rangappa says:

      1) It is, so its pointless to make that I guess.
      2) Highest price range gives you a higher chance of allotment. But no guarantees here.

  81. Mayuresh Warang says:

    Hows the initial share allotement decided like the angel investors will be allotted only 5% shares. Consider if they have invested more than 5% of Initial capital say 25% each, why would they settle for 5% as the allotted shares would be only means they could claim there investment.

  82. suraj says:

    Hello Karthik Sir, I wanted to know what happens to the Face Value (FV) of those shares during several funding stages?

    At the beginning (Angel stage) FV was Rs.10/- but during subsequent funding stages the valuation changed.

    So my doubt is how is this new valuation reflected in the share value, whether it is as a change in FV or simply as a premium over and about the initial FV of Rs.10/- ?

  83. Pratik Shinde says:

    I have learned a lot from zerodha varsity and cannot express my gratitude. The way difficult financial concepts are explained in a lucid manner is beyond verbalisation. The Stages of various funding’s, a business go through explained in this chapter is mesmerising and interesting, from initial seeding till IPO. Can you recommend a book for further reading to expand on the topic.
    Thank You

    • Karthik Rangappa says:

      Happy to note that, Pratik. Note sure of a book on IPOs, but will keep an eye out. Will inform you if I come across something worthwhile.

  84. Pratik says:

    Dear Sir,
    You mentioned “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.”
    How did he come up with value of 50 crs ?

  85. Mudassir says:

    The table for PE Funding is wrong. This is the correct valuation table.
    PE FUNDING 15% stake for a consideration of 60Crs
    Company valued at 400cr Per Share= Rs. 800

    1 Prom 2,00,00,000.00 20,00,000 40%80 Crs
    2 Angel 1 25,00,000.00 2,50,000 5% 10 Crs
    3 Angel 2 25,00,000.00 2,50,000 5% 10 Crs
    4 VC Series A 7,00,00,000 7,00,000 14% 28 Crs
    5 VC Series B 10,00,00,000 2,50,000 5% 10 Crs
    6 PE Series C 60,00,00,000 7,50,000.00 15%

    42,00,000 84%
    The total number of shares should be 42,00,000 instead of 44,50,000.

    • Karthik Rangappa says:

      Possible, let me relook at the numbers. Thanks for pointing it out. However, the focus at this stage was just to convey the concept.

  86. Ritesh Lakra says:

    hello Kartik Sir,
    How does first VC values the 14% of company shares at Rs 7cr.? why does he agree to pay higher share price than current value?

  87. Anil Sonar says:

    Amazed with simplicity with which you have explained entire process (not really concerned with small calculating edits – rather concept is powerfully explained), this definitely need to reach to all early stage entrepreneurs who actually do not have access to this vital information of business evaluation. Would like to invite you to our business forum BNI and Saturday Club Global trust to meet highly charged business professionals from all industry segment. kindly pass your contact if possible so that i can discuss further with you.

    • Karthik Rangappa says:

      Thanks for the kind words, Anil and also thanks for the invite. I’d suggest you mail my colleague [email protected] for this.

      PS: I’m glad you spared me of all the calculating edits, as you rightly pointed, the focus is on the process 🙂

  88. sudarshan.g says:

    so do i need to first open an account with a DP and then with zerodha or only an account with zerodha if i want to trade shares.

  89. Meet Patoliya says:

    At time of funding new valuation of company is decided. How is it done? Can you name factors affecting that?

  90. raj23 says:

    This is really very helpful, I don’t know how to express my gratitude. Please help m out here
    At very first scenario the company valuation is 5 Cr out of it promoters is 40℅ and two AI has 5℅ each and remaining 50℅ is retained by company.Here Company’ share means 3 people share rite. does this mean aactually promoter is holding 80℅ and two AI are holding 10℅ each

    • Karthik Rangappa says:

      Yes, that would be the split. Also, I’d request you to get the over all flow of the concept and not really dwell deep into the numbers.

  91. Dharmesh Amin says:


    i have recently opened my demat account in Zerodha and now i want to start trading. Can you guide me how shall i buy the stocks for long term?

    thank you.

  92. P.S.perumal says:

    What is the minimum investment for venture capitalist and private equity
    Venture capitalists /private equity they can able to become board member or not

  93. Bipul Kumar says:

    If company issue IPO at some price, but can you tell me that, Is IPO issue in a lot or in number? Can we purchase in any number?

  94. Pratish Khakhkhar says:

    Thanks so much Kartik, you have answered all my queries in this single article..
    beautifully explained and simple to understand.
    I have read so many texts trying to explain the same thing and making it look like a rocket science.. 🙂

  95. P.S.perumal says:

    Hello sir I like to do Forex trade on some international stock exchange what should I do to open a trading account

  96. Vineet says:

    The valuation of the company goes up when a VC or PE invests in the company.
    Is the calculation of the new valuation simple math or it is decided by the VC/PE? If so, how do they decide on the final valuation?

    • Karthik Rangappa says:

      It’s a mix of math + finance + goodwill.

      • Bhaskar says:

        Hi Karthik,

        It is very good initiative/commendable job, i came across this very late after 3 years, but very useful and gives almost complete insight of Markets. this really fills the void of Knowledge sharing of Markets and Equity Analysis in a broad prospective. Thanks to you and your team for this.

        1) I have a simple doubt.

        Based on previous discussion on the cited example, if during nascent stage of business,
        Promoter invests 4 cr
        Angel 1 invests 50 lakhs
        Angel 2 invests 50 lakhs

        and during authorization (100%) and issue (50%) of shares,

        if promoter keeps only 40%- 2 Cr (less compared to his share of investment)and 5 (50 Lacs) each by Angels, remaining 50% were in the companies name (virtually the investment by promoter only.)

        But after all cases, and after IPO and listing,

        if the value increases 80 times to 400 crores ( 5th SHP Table) and as the promoter had not issued 50% share of him to him initially before the sale of stake to VC & PE, will it be loss ( increased valuation of non issued initial shares now goes to company capital only but not to promoters stake) to him for remaining 50%?

        At a later stage (like the case of infosys), initial promoter goes out with selling of major part of thiers, then will it be a loss for him ( as the risk and take off of business idea and hardwork behind growth is by him majorly) ?

        In this perspective, initially, is it better to issue all the remaining authorized shares to him or decide some percentage (40% as mentioned by you ).? Please clarify?

        2) Typographical error in 5th SHP Table for PE-C No of shares are 750000 a sper 15% for 5000000 total authorized shares. and Total number of shares is 42 crores for 84% of total Value of 336 Cr.

        From Bhaskar

        • Karthik Rangappa says:

          Bhaskar…I’m really glad you liked the content here on Varsity.

          The IPO example quoted here is just to give you a fair idea on how a company goes IPO and the different stakeholders benefit. I’d suggest you do not pay too much attention to the numbers quoted in the chapter.

          • Bhaskar says:

            Any way, I mainly focused on conceptualization only and not on numbers.

            Thank You once again for such a good pedagogic explanation of all articles.

          • Karthik Rangappa says:

            Thanks, Bhaskar.

            Good luck and happy learning.

  97. Himanshu Makwana says:

    How company valuation increased 10 times after 7 Cr investment by VC.

    Can you please elaborate this valuation.

    • Karthik Rangappa says:

      Guess, it’s already done in the chapter.

    • Pankaj Kumar Prasad says:

      “Going forward with our story, the promoter now has the additional capital he requires for the business. The company gets an additional manufacturing unit and few more retail outlets in the city as planned. Things are going great; popularity of the product grows, translating into higher revenues, management team gets more professional thereby increasing the operational efficiency and all this translates to better profits.”

  98. niranjan says:

    Sir, what is your take on seven hills-ipo
    Should I subscribed??

  99. Pankaj Kumar Prasad says:

    These modules must be circulated as much as possible. Informative without the hassle of ads or disintegrated topics all over the internet. Simple and precise construction of general (till now) topics one after the another with a very good build up, very well written.

  100. shishir sonekar says:

    Is details of unallocated shares are publically known to the public or its confidential.

    Also, where does the unallocated shares profit dividend goes! is it a part of company’s fund?
    If yes, then it should also add up in the company’s valuation metric.

    • Karthik Rangappa says:

      It will be known. Profits will be allocated as per the share holding….balance will be parked in reserves.

  101. Sherwin says:

    Can you please explain me this “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs”. Initially the company was valued 5cr because their capital was 5cr(including angel investors). But now how its valued at 50cr. Can anyone explain me the logic or theory? From where did this 50cr come from?
    (Sorry I’m not well versed with Financial concepts. Please don’t mind if this question is too generic). Thanks

  102. DJ says:

    1) If promoter is investing 4 crore which is 80% of the investment and angels are also investing 50-50 lakhs which are 10% of the investment then why would they retain only 40% and 5-5% shares? Don’t they want the other profit company is having?

    2) Help me to understand the valuation of company, I still can’t get it after reading some comments.

    • Karthik Rangappa says:

      1) The profits are to the extent of the shares held
      2) Which part is confusing? Can you kindly elaborate?

      • Suresh Nagarajan says:

        We understand that “The profits are to the extent of the shares held”, but question is not that. question is why would the angels settle for 10% of shares while the contribution to the company’s capital is 20%.

      • Suresh Nagarajan says:

        for the first question, We understand that , but question is not that. question is why would the angels settle for 10% of shares while the contribution to the company’s capital is 20%.

  103. Paramveer gupta says:

    Hello sir ,
    Just wanted to know if the total number of shares can only decided by the seed fund or could they vary .
    And also please explain what is the importance of face value of a share .
    Thanks .

  104. Suresh Nagarajan says:

    Ref. Scene 1: It’s mentioned that Promoter along with 2 Angels, contributed 5 Cr, but how much by each is not mentioned. This abstraction makes it difficult to understand the ownership of each party at any point and in case the company need to be dissolved.
    Only 50% of the authorized shares were allotted in this example. Is all the 50% unallocated shares are promoter’s share which he wanted to keep in the name of company OR it may include angel’s share as well?

  105. P.s.perumal says:

    What is the difference between ofs and fpo and ipo

  106. kunal says:

    karthik ji where r the answers of last 7 questions

  107. rishikesh says:

    the Venture capatalist here is paying 7 crores for 14 % equity i.e. company is valued at 50 crores. But the total cash and shares company had was worth only 5 crores. Then how is it valued directly to 50 crores? Does this means that company expanded on its own to 50 crores ? 50 minus 7 equals 43. So does this means that the company just before venture capatalist investment was worth 43 crores?
    How is the company’s worth decided ?

    • Karthik Rangappa says:

      The incremental income is the Valuation. For example, assume Infy has 5 Cr shares at a face value of Rs.5, does that mean Infy is worth just 25Crs? No right? Likewise here.

  108. santosh patidar says:

    Please answer my queries
    1.)When company goes public, promoters goes to brokers to register their share into demat ? ( Where promoters shares stay after public ? ).
    2.) Who has the details of all the share holders of a company ( who is having details of say INFOSYS shares ?).

    • Karthik Rangappa says:

      1) All shares would be in DEMAT mode, yes, they too have to approach a broker and a DP
      2) The registrar of the company would have this information.

  109. garg10may says:

    It will be very beneficial if we can have a case study of any famous companies, like ola, uber, oyo etc. Or if you can direct me to some link or book about it.

  110. Neeraj Nirbhavane says:

    Angel investors are like shark tanks ?
    does these Angel investors are active in the companys work ? or they just provide the money to expand the business and let the company grow as well as ther investment?

  111. P.s.perumal says:

    If a share has not trade for 30days so that the exchange removed the share from that exchange so what will be happen to that share in my demat holding

    • Karthik Rangappa says:

      They won’t remove it from the exchange, rather they will move it to a lower category of stocks, like maybe the Z group.

  112. Naveen K Mahendra says:

    Hats off to the author. So clearly written!

  113. Saransh says:

    The company does not raise debt from banks as the interest burden would eat away the profits. But in case of IPO also, the company has to distribute its profits among the shareholders. So wouldn’t that eat away the retained profits of the company as well?

    • Karthik Rangappa says:

      But they are not obligated to pay if there are no profits! Remember when you buy shares, you are like a partner of the company!

  114. Amit DUBEY says:

    There are thousands of shares listed on NSE& BSE? Were IPOs issued in all these companies? Is it mandatory to issue IPO for listing on exchanges? If yes then why would investors subscribe to IPOs in companies with negligible finances(penny stocks), doubtful management and low profile as later on scrips keep getting delisted on regular basis every year? Thanking you in advance.

    • Karthik Rangappa says:

      Yes, most of the companies are via the IPO route. Some debut based on corporate actions like – M&A/Spin-off/Amalgamation etc. No idea why investors do that – greed perhaps?

  115. Anuraag says:

    Fantastic explanation..!! I have a query. Valuation does not mean capital right? Its just like brand value is it?

    • Karthik Rangappa says:

      It means the value of the underlying business. In simple words, it is how much you would pay to buy out a business completely.

  116. Swapnil Fadnis says:

    excellent explanation!!

    I have a doubt about authorized share capital, as per my knowledge authorized SC is not shown in balance sheet, t.hen how will balance sheet look like at scene 1 where asset side will have 5cr in cash and laib side will have 2.5cr as SC.
    please correct me if i’m wrong about the authorized share capital.

    • Karthik Rangappa says:

      The share capital is an integral part of the balance sheet. It is shown in the equity (or liabilities) side of the balance sheet.

  117. Shanmugha Priya says:

    Hi karthik sir,
    Thanks for the easy explanation of “Why do companies go public?”.
    If I may point out a small correction – Kindly change the no of shares from 1,000,000 to 7,50,000 in the table “PE Series C – 1,000,000 @ 15%”.

    • Karthik Rangappa says:

      Thanks, Shanmugha. Yes, I know somewhere the numbers have got mixed up. But like I pointed out earlier, the point of this chapter is to give the reader a general sense of how an IPO happens 🙂

  118. Praveen Kumar says:

    How the shares were distributed between the promoter and 2 Angels?

    I am little confused here.

    How much they invested and why the shares they got were not promotional to the investment they did?

    When they invested 100% of the company but they got allotted with only 50%.

    Can somebody explain me about this.

    • Karthik Rangappa says:

      Praveeen, like I have stated multiple times in the comments above, please don’t get into the numbers. I know they are a little mixed up. The idea is to get the flow.

  119. mohammed says:

    what is the interest on zerodha margin? will they cut automatically or do we need to pay separately?
    Also please help me in understanding the funds module in the kite app.what is free cash etc etc?
    Similarly, how to understand the margin statements send by zerodha?

  120. Ankur D says:

    Awesome. Super Like.
    Concept wise full clear.

  121. sainath says:

    In this case study, you have mentioned that out of authorized shares – 50% have been issued between promoter and angel investors. Is this a fixed ratio prescribed by any law? Can issued shares be entire 100% of the authorized shares?

  122. chidambaram says:

    Hi Sir,
    1.In the example given above,The entire amount(5cr) for Authorised share capital was funded by angle investors and promoters.Mean those 3 altogether should own 100 % share Authorised share capital.But in this case how will they agree to just take 50 % of it??? Its confusing …!!
    2.In what basis the Initial share allocation will happen between Angel investors and Promoter?Is it based on the capital the bring in?
    3.Its that since VC is valuating the company at 50 crs the company valuation raises or since the companies valuation raised, the VC is doing so?
    4.Sometimes, On the day when a good news is published,the share price falls drastically.Why is this happening? How should we act to this situation?Should we need to hold our trade(if we have entered it after all checklist confirmation) to reach the target or should we need to exit(without target been done)?

    • Karthik Rangappa says:

      As I’ve indicated, the numbers used is only to give the reader an overall idea of the IPO journey works. Please dont get into calculations.

      • Arun says:

        I started doing a random reading (as I am trying to explore equity based investments) and this article looks fantastic material to follow for someone who has no previous knowledge on stock market, great writing !

        By the way, I have the same questions as “chidambaram” asked about the initial share distribution among promoter and angel investors, and I read your comment to ignore the numbers.

        Sorry to ask again, but I am keen to understand the logic you used in the example to split the shares initially ? Should I assume that the promoter and angel investors contributed 80%, 10% and 10% respectively to capital (5Cr) ?

  123. vinod says:

    the company has to retain some amount of shares with itself to be issued in the future– Why company retain the shares why not total share is distributed between three persons in their investment proportion who started the company.

    • Karthik Rangappa says:

      Companys usually allocate shares to be distributed to future employees – you may have heard of the employee stock option scheme. This is done to incentivize and retain talent.

  124. Anirudh Rayabharam says:

    “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs”

    How does the VC decide the valuation of the company? What would have happened if he decides to give INR 7Cr for just 1% of the company? Wouldn’t the company be ridiculously overvalued? Are there any implications of this? Is this regulated?

    • Karthik Rangappa says:

      No, the VC world is not really regulated. Come to think of it, the valuation part of the stock market is also not regulated. The market operations are regulated, but not the price discovery part. Remember, different opinions are what really makes the market.

  125. JAY says:

    Hi Karthik,

    Why total valuation of the company/no. of shares is not divided among three of them i.e., 80-10-10 % based on each investment/investor & sell later stage their share for raising the CAPEX?

  126. Ricky says:

    Hi Karthik,

    In an IPO, Who/What decides how many numbers of shares will go on NSE and how many will go on BSE?

    Lets says a Company A comes up with an IPO of 100 shares , how many will go on NSE and how may will go on BSE?


    • Karthik Rangappa says:

      The management decides to what extent they want to dilute their shareholding and this translates to the number of shares. The shares will get listed on a certain exchange and the same will start trading (as in the price will be seen) at both the exchanges – you are free to buy or sell on any exchange.

  127. Chandru says:

    Great work guys☺️. U guys made it simple to understand.

  128. Arnav says:

    If the company has 5 crores as Seed Fund and it is braking even when the VC decides to invest in it, this means it is spending 5 crs and making 5 crs right? then the VC invests 7 crores into the firm. So the company actually has only 13 crs in real tangible money!

    Now if the promoter has his 40% share valued at 20 crs, why is it being called wealth creation when there is no asset or money to actually back that wealth??

  129. Nihit says:

    From the above explanations, can we conclude that seed fund is the authorized capital of a company ? or anything there to know about the authorized capital of the company.

    • Karthik Rangappa says:

      No, both are different. Seed fund is the capital raised to kick-start the business. Authorised capital, on the other hand, is related to the share capital of the company.

  130. Amit says:

    In the starting of business, you said the company’s valuation is INR 5 crs.
    But after investment of 7 crs by first VC, you said the initial valuation is 2.5 crs in Table 4.3

    I don’t understand. Can you help here?

  131. Rakesh says:

    Can you please help me understand the wealth creation part? Is this just notional? How is the company’s valuation (after say Series A funding) agreed upon?

    • Karthik Rangappa says:

      Its not notional. Its transaction is driven. Its based on the fact that someone else is valuing the shares at a much higher rate compared what you acquired it at. So naturally, there is a lot of wealth created.

  132. Amit says:

    Sir, you’ve not replied to my question yet. Check last third comment please.

  133. Nandan Sarkar says:

    Initially promoter and angel investors gather 5 cr. for the business to start and the company is valued at 5 cr.. Later on, when the VC invests 7 cr. into the business why the company is valued at 50 cr. should it not be valued at 5+7=13 cr. ?

  134. Divyajitsinh Parmar says:

    What is the difference between VC and PE ?

  135. ashish says:

    i am not able to find the stock for icicisecurities and mishra dhatu post ipo listing ,till clarify what is the process of ipo trading in zerodha kite after they are listed

  136. Vamsi N says:

    How is this percentage of share allocation calculated? It is very confusing.
    How are we predicting the company value and is this allocation based on prediction? Or it is upto management decision on how much share percentage is to be allocated?

  137. Ashish Sharma says:

    I think there is an issue with the calculation of no: of shares in Scene 4 : Assuming they pick up 15% stake for a consideration of 60Crs. The total no: of shares for PE investor should be 750000 and not 1000000. Kindly edit this.

  138. Vijeeth says:

    The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.
    Note, with 10Crs coming in for 5%, the valuation of the company now stands at 200 Crs

    Can you please explain how the valuation of the company is being calculated ??

  139. Kunal vishwakarma says:

    Great sir, i understand whole scenario, suppose companies have little number of share, how can increase it ?

  140. Mangesh Baxi says:

    What if there is a proxy VC, who picks up just 1-2% of the shares for a large value, won’t the valuation of the company get inflated? Also many loss making companies like flipkart & snapdeal attract VCs. Then how is the company valued even if there are no profits? Is just a subjective judgement?

    • Karthik Rangappa says:

      Indeed, Mangesh. End of day, valuation is highly subjective and people pay for what they perceive as great value. Value is dependent on what these foresee in the future.

  141. Aravind says:

    total number of shares of the company will remains same or will it multiply?. example if a company A has 100 shares in 2010, it will be having same number of 100 in 2018 or will it be more??

  142. Khurshid says:

    Dear Karthik,
    If the angel investor and promoters collects the entire 5 Crs. (100%) then how a company issue only the 50% share to their promoter and angel investor? Company should issue 100% value of share in their promoters and investor according to their investing proportion! please clear it.

    • Karthik Rangappa says:

      Khurshid, what is the point of giving 100%? What incentive would the promoter have to conduct business?

  143. Sunil says:

    Hi Karthik, Great writing. Thanks a lot for making me understand most of the concepts with ease. I’ve one doubt, Initial offerings to Promoter and Angel investors does depend on the % of the amount they’ve invested or how they’ll calculate on how much % of share to be divided among the three?

  144. Venkatesh says:

    I have the following doubt on the above articles:
    1. It is mentioned that the promoters and the two angels contributed Rs. 5 crores in the initial stage, which was considered as Authorized capital. So it means that the company is liable to pay them Rs. 5 crores.
    2. But they were allotted only shares worth Rs 2.5 crores. Which means company is liable to pay them only Rs. 2.5 crores even when they had contributed Rs. 5 crores. What is the status of balance Rs. 2.5 crores contributed by them?? Only issued capital will be paid by the company and not the Authorised capital. Can u clarify me with regard to this?

    • Karthik Rangappa says:

      There is no liability as such when shares are issued you are a partner in the business.

      • Venkatesh says:

        The company has the liability to pay them at the time of winding up right?? So if the company issues shares of worth only Rs. 2.5 crores making it liable only for Rs. 2.5 crores at the time of redemption of shares, what happens to the balance Rs. 2.5 crores invested by them. It is also a liability on part of the company as it haa received it from the promoter and the angels.

        • Karthik Rangappa says:

          The company is not obligated to pay its shareholders in the event they decide to wind up /file for bankruptcy. They first have to service the debt holders before servicing the shareholders. So no liability as such.

  145. Dibakar Bala says:

    What if any of the VC, PE or Angel Investors decide to sell out their Shares ? What happens to the Company Valuation? And, who gets to buy those shares ?

  146. SR says:

    Once the IPO is done and the all Shares are Sold Out.
    If the company again needs to raise the capital?how does it do ?

  147. errol says:

    What happens when company has exhausted all the shares allocated to public and there are no shares left to buy(Neither anyone is selling their shares)

  148. Pankaj K says:

    Although you have edited certain modules to keep them updated as per prevailing laws….the downloadable PDF modules r still not updated. Pls do so at earliest.
    Thanx for the superlative efforts though.

  149. vansh says:

    what does the company do if the shares are oversubscribed ? suppose a company offered 1 lakh shares but the public purchased 2 lakh shares . so now how are the shares distributed?

  150. KUNAL says:

    Can you please explain WhatsApp’s business modle and how do they earn and manage to convince investors to invest in them. Since they do not charge not even a rupee and there are no adds like Facebook and Google to generate income!

  151. Mohit Khaitan says:

    I am not able to get the part, where the VC is valuing the business at 50cr. “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.” Is this an assumption made by the VC or something else. Please help. Thanks.

    • Karthik Rangappa says:

      Its simple math, Mohit – if 7% of an asset is valued @ 14 Cr, then 100% of the same asset should be 50Cr.

      • Anshul Mittal says:

        Hi sir

        I have 2 doubts:

        1. Why would promoters and angel investors retain only 50% of the shares ?

        2. Assuming company has not started the work and INR 5cr is in company’s bank account as it is. Now as we have assumed price of each share is INR 10, that means 10% stake would be valued at INR 50 lacs. So if a person A buys that 10% stake, then he would deposit INR 50 lacs in company’s bank account. Now my question is, the 2 angel investors by giving 50 lacs each have stake of 5% each and the person A by contributing the same amount holds 10% stake. Doesn’t this mean that angel investors are at loss here ?

        • Karthik Rangappa says:

          Anshul, like I’ve mentioned in the comments this example is to just give you a brief overview of scenarios leading upto an IPO. Dont read too much into the example as its a fictionary one and obviously bound to few errors.

          • Anshul Mittal says:

            Tnx for the reply sir.

            So does this mean that authorised share capital which is said to be 5 cr in the example, also not correct. Bcoz I hv read that authorised share capital can be way more than company’s worth.

            Also 5cr should be called issued share capital as it is the sum of shares held by shareholders and company treasury.

            2.5cr should be called the outstanding share capital.

            Plz correct me if I’m wrong here.

            I’m too confused regarding all these terms.

          • Karthik Rangappa says:

            Let me re read this artile and get back to you 🙂

  152. csp says:

    Very crisp and knowledgeable!

  153. Anshul Mittal says:

    Hi sir
    Anshul here

    You said yesterday that you will re read the article. Have u done that sir bcoz I am very eager to clear my concepts.

    Thanks in advance.

    • Karthik Rangappa says:

      Anshul, I’ve not that yet. But I guess your explanation is right.

      • Suresh PJ says:

        Hello Anshul,

        I have the same question in my mind.

        @Karthithik, I could not understand the first part of the story. Cumulatively, the company have 5crs. The Angel investors are taking 5%. How they are valuing at the time? How much they are possibly investing in this example scenario?

  154. Mihir says:

    I did not understand the 10 fold increase in valuation. If the Series A investor is putting in 7 Cr, the actual fund in the company bank account is 12 Cr. But if we check valuation in terms of shares, it is 50 Cr.
    So the actual asset company owns is of value 7 Cr but the company can quote a valuation of 50 Cr in the market?
    I am confused!

    • Karthik Rangappa says:

      Yes, valuation is a function of future growth right? So that gets factored in and hence the valuation increases.

  155. Thanush says:

    Are issued shares the shares of the originals or the shares given to public/insiders?
    Also what do you mean by , ” Please note the balance 50% of the shares totaling 2,500,000 equity shares are retained by the company. These shares are authorized but not allotted. ” ?

    • Karthik Rangappa says:

      Thanush, yes, these are the initial set of shares. Authorized but not allotted implies that the shares are not issued to anyone.

  156. Thanush says:

    Im sorry for asking many doubts

    BUT 1) the balance 36% of shares is still retained within the company and has not been issued. Why do they not issue to the public

    2) Now, with the VC’s money coming into the business, a very interesting development has taken place. The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. ” With the initial valuation of 5Crs, there is a 10 fold increase in the company’s valuation.” how does it increase tenfold?

    • Karthik Rangappa says:

      1) This is the decision of the management, right?
      2) The increase is an outcome of the valuation. If an entity is willing to pay 7Cr for a 14% stake, then it means 100% is at 50Cr.

      • thanush says:

        Okay, so it means that after the VC valuated the company, they saw that at the current rate its worth is 7 crore at 14% rate and its maximum potential(100%) is 50 crore.

      • Sriram says:

        The VC entity is paying 7Cr for a 14% stake. How do they decide that it is 14%? Instead of 14%, why not 10% (on lower side) or 20% (on higher side)

        If they claim this to be 10% stake, then hypothetically the company is valued at 70Cr which makes everyone even more happier. Can you please clarify

        • Karthik Rangappa says:

          Sriram, the decision to but either 10% or 14% is entirely upto the VC. This depends on the perceived valuations of the company.

  157. Rahul says:

    Hi, I am rookie and want to know what happens to that 50% of not-allotted shares in the early stage? Are they in bank or are they not even created?
    Thanks anyway,!

  158. Sai Rikwith says:

    Hii Sir
    When PE bought 15% stake in company, no of shares are 7,50,000 please correct that.

  159. Ranjak says:

    Can you please explain how is a company valued ?

  160. Akib says:

    Kartik, can u explain the calculation of valuation?

    From 5cr to 400cr

  161. arun says:

    Very good explanation

  162. vinoth says:

    In Angel investing, why promoter has 40% and other two angel investors has 5% each
    1. Eg. if all three invests same amount initially, will everyone get 33% each? or 16.66% each

  163. Abhi says:

    “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. With the initial valuation of 5Crs, there is a 10 fold increase in the company’s valuation”???
    How does 10 fold increaseing in company valuation?

  164. Somil Kumar says:

    When VC comes by investing 7 crore rupees for a 14% stake and initially investment was 5 cr how come company valuation went to 50 crore. It must be 12 crore. Please explain.also 50% is comapny shares what does that mean? Who has the right on those shares? Are those of enterpreneur or angel investors?

    • Somil Kumar says:

      Ok i understood the valuation part but 50% company shares means what??? They belong to angel investor,vc or the enterpreneur?????
      Also big businessman can start a company even if the company is not working they will convince other big investors to buy the company stakes at a lower percent but high cost and will divide the profit equally. Example in this case 5% stake for 20 crorenow the valuation will be 400 crore. And they can make a easy fool to someone with money by showing high valuation of the company. How it is prevented?

    • Karthik Rangappa says:

      The 7 was new investment. Also, I’d suggest you run through the comments, Somil.

  165. Priyvrat says:

    A very simple narrative and to the point. Awesome work,Thank you !

  166. Advait Vasavada says:

    Wow, the simplicity of your explanation is insane !! Thank you.
    How is the company valued if some investments are undisclosed?

    • Karthik Rangappa says:

      Hey thanks, Advait 🙂

      If they are undisclosed, then it becomes an issue for outsiders and you cannot get a fair sense of true value.

  167. Chibi Dhanaraj says:

    Hi Karthik,
    Isn’t it 15% of 50 lakh shares equals 750,000 shares for PE Firm investment? Or any other assumptions inside?
    Please correct me if I am wrong

    • Karthik Rangappa says:

      I think its 14%. Let me double check, Chibi. But please don’t pay attention to the numbers here. What really matters is the general flow of events.

  168. Ganesh says:

    Amazing way to explain how businesses work and grow! Thank you for this.

  169. Suraj says:

    I am new to the stock market and I am liking this Varsity very much because of the way things are explained. I have one doubt. Can somebody explain me that how come a VC is valuing the entire business at INR 50 Crs? I am not able to get that from where this 50 Cr came. I am posting couple of lines from article too.

    Now, with the VC’s money coming into the business, a very interesting development has taken place. “The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.” With the initial valuation of 5Crs, there is a 10 fold increase in the company’s valuation.


    • Karthik Rangappa says:

      Suraj, I’m glad you are liking Varsity!
      The valuation bit is simple math – if 14% is valued @ 7Cr, then 100% is valued @ 50%.

  170. Pranav Ballaney says:

    Hello, Karthik Sir.
    I realize that there have been a lot of questions on valuation, but I couldn’t find any answers to my question there. If you allow me to bother you with another question, here it is:

    Earlier, the promoter issues a 10% stake to the angel investors for Rs 5 crores, and since the company only has Rs 5 crores, the valuation is Rs 5 crores.
    When the VC invests, the valuation is Rs 50 crores, because of the investor’s belief that Rs 7 crores translate to a 14% stake in the company.

    This calculation seems inconsistent. The angel investors invest Rs 5 crores for 10% stake, which also translates to Rs 50 crores for 100%. In the first case, valuation is based on the actual money the company has, but in the second case, the valuation is based on the value the investors perceive the company has. Is this an exception, just for the initial stage, or something else?

  171. Vijayant says:

    Where can i read about valuation?

  172. Paras says:

    At the initial stage the promoter manages to start his business with the share capital of INR 5Cr in the company’s bank account which comprises both his own money and the money of two angle investors. Now in return to this investment each one of them are allotted shares (which entitles them as part owners of the company) as follows;

    Promoter – 40% (i.e. 20,00,000)
    Angle investor 1 – 5% (i.e. 2,50,000)
    Angle investor 2 – 5% (i.e. 2,50,000)
    Withheld by company 50% (i.e. 25,00,000)

    Now my question is, what is the reason behind such distribution? Is there some distribution determining principle or are they distributed randomly?

    One more thing….. According to me distribution should be made proportionally to how much sombody invests. If to the investment made of INR 5Cr sombody’s contribution was say INR 1 Cr then ideally he should be getting 20% of shares and so on. DOESN’T SHAREHOLDING PATTERN WORK THIS WAY ?

    Someboby please make it clear !

    • Karthik Rangappa says:

      The distribution really depends on the capital structure of the company, which the company’s board decides. There are no rules here. The distribution depends on how much cash you invest and how much effort you’d put to run the company on a day to day basis, and also how you’d help the company expand. So it is not always about the investment you’d bring in.

  173. autodidactg says:

    In the Example provided, the Seed fund (and eventually, the initial share capital) of the company of 5 crores is provided by the promoter and the two Angels.

    So how the allotment of 40%, 5% and 5% shares are done?

    Ultimately, all the initial investment was coughed up by these three. So it follows that the three should be allotted 100% of the shares in proportion to the money they put in.

    If the two angels for example, both put up 5% each of the Seed Fund, then the rest 90% of the Seed Fund must’ve been coughed up by the promoter. So it stands to reason that he should get 90% of the shares (instead of 40% in the above example).

    So why doesn’t that happen?

    Also, are the share percentages here arbitrarily assigned?
    Or is it that its decided before that:
    1. A certain percentage of shares will be issue (here 50%).
    2. The promoter and angels will get shares out of that (50% here) in proportion of their contributions (40:5:5 = 8:1:1 here)?

    • Karthik Rangappa says:

      This is an arbitrary example with an aribtrary share split, just to help the readers understand the flow of things which leads to an IPO. Please dont read into the details of the how VC or angel funding works 🙂

  174. Shashikiran Jeppu says:

    Hi Karthik,
    You have been replying to these articles for almost 5 years now! that is just awesome. Love the article, you made the whole thing interesting and easy to understand.
    Thank You

  175. Happy says:


    Amazing explanation.

    One query:

    What does it mean when you have mentioned in starting that
    Company has INR 5 Cr and authorized capital of 50 Lakhs of Rs 10 each
    But issued capital is half i.e. INR 2.5 Cr.
    It’s mentioned, balance 50% is retained by the company.
    What does it mean in terms of balance sheet?
    Asset side – INR 5 Cr (Cash)
    Liability side – INR 2.5 Cr (Equity Share Capital)
    What about remaining INR 2.5 Cr?
    Authorized Capital is only a disclosure in notes and is not a part of liability calculation. Issued capital is what we take into account for computing liability side total.

  176. Happy says:


    Thank You.

  177. RaJKuMaR says:

    Superb Explanation…


  178. Nirmal M K says:

    In this section, I did not get the concept of this statement below!
    ” The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. ”
    How does this 50Cr come into picture?



  180. Sanket Sarkar says:

    Why valuation of a company will come down when additional shares are issued?

  181. Sanket Sarkar says:

    It was said that the merchant banker
    has to buy all the shares and then they are sold to public. In case of under subscription what happens to the remaining shares?

  182. Sanket Sarkar says:

    Suppose a company is valued at ₹100 crores and no. of outstanding shares is 1lakh. Now suppose the company wants to raise ₹10 crores and so issues 10,000 additional shares. Then this time the company should be valued at 110 crores. Isn’t it?

  183. Purushothama.P says:

    Hi Sir,

    You made Share market a “simple market”.
    We have many people who find difficult to decode English content on this subject.

    Please put content in regional language ex. kannada.

    i’m very much thankful to you to put an ocean of information here.
    comments too are like test at end of every chapter.
    Amazing work.
    Thank you

    • Karthik Rangappa says:

      Thanks for the kind words. Getting quality translation can be a challenge, however we are at it, lets see how that goes.

  184. Manan says:

    Hi sir,
    I have a query.

    You said now the company is valued at 50 crores and promoter having a 40% share has a valuation of 20 crores.
    While overall capital here is 12 crores (in the bank).

    Now suppose the company falls down in a single day due to some natural disaster.
    How much money would the promoter get? If his holdings are valued at 20 crores, where will that 20 crores come from??

  185. Manan says:

    Liquidation won’t give 20 crores, right? I mean to say that while promotor shares have a valuation of 20 crores, he won’t actually get 20 crores if the company shuts down. Am I thinking right?

    • Karthik Rangappa says:

      Thats right. Depends on the residual value. By the way, the idea of this chapter is to help readers understand the typical scenario for a company to go public. Thats really the objective and not really to read through the technicalities 🙂

  186. Girish says:

    Respected Sir,
    I have a doubt. In my opinion, the percentage of shares held by person is calculated as a percentage of Total Issued Shared Capital (ISC) of a Company. I don’t think it is calculated a percentage of of Authorized Share Capital (ASC) because ASC is just an advance authorization to issue shares in future. It is not backed by any underlying asset such a cash or bank balance or any other asset. This is the reason why we take the amount of ISC for calculating the total of Equity and Liability side of Balance Sheet. ASC is simply disclosed in Notes to Accounts and doesn’t form part of Balance Sheet. Kindly enlighten me Sir.

    Thanking You

  187. Girish says:

    Thank You Sir.

  188. abhijeet says:

    hi Karthik
    i have 2 doubts about IPO
    1)if i am applying as a retail investor and exhausted Rs.2L limit can i also apply in shareholder quota for another rs.2L or it has to be combined and within 2L limit?
    2)Let say the DRHP is filed on 1st jan 2020 and IPO is launched on the 15th jan and i bought 1share of that company after DRHP-then can i apply in share holder quota or do i need to apply as RII

    • Karthik Rangappa says:

      1) No, single application per PAN
      2) I think you can, depends on the company’s policy. For example, both Ujjivan and SBI had this option.

  189. Robin Sethi says:

    Hi Karthik!

    Awesome content! Just have one doubt, how can a VC’s stake valuation decides the whole company’s valuation ? Others(promoter+angels) get the benefit, but where does real money flow come in from?

    • Karthik Rangappa says:

      Robin, the valuations can be dependent on many factors – revenue, market size, opportunity size, margins etc. Yes, others too get the benefit but this expected for the efforts they put in.

  190. Robin Sethi says:

    1. So valuations does not ensure that their shares have the exact value(please explain in context with real money flowing into their accounts)?
    2. Are shares locked with the VCs or Promoters or Angels or PEs until they bring IPO and get listed(as ipo can be considered as exit option for promoters etc.) ?

    My only concern is how the initial investment of 25lakhs becomes 2.5crores with one person bringing 7crs in the business? Value increases proportionatly- I get this, but what about cash inflow?

    • Karthik Rangappa says:

      1) The money flow is dependent on the valuations. For example, if a company is fully valued at 500 Cr and I intend to buy 20% of the company, then I have to shell out 100Crs. Here valuation is 500Cr but the money flow is 100 Cr

      2) Nope, depends on the company

      3) Depends on valuations, right?

  191. Robin Sethi says:

    Thank you!

  192. Dhara Chellani says:

    Now as there is remaining 31% left, my question is can a company opt for FPO option in this situation?

    If Yes, Is FPO to be considered as increase of Authorized Share Capital or only upto 31% a company here can opt for FPO ?

  193. myneni siddhartha says:

    At the initial stage when the total capital raised from friends is 5 Crores, you are assigning the friends 5% shares to the friends.
    Assuming that the friends have contributed 2 Crores each and the promoter contributed 1 Crore, we are at that point of time writing down their investment to only 25 Lakhs per head.
    How did they accept such a valuation, will they be happy to see their money dwindle by 75% instantly?

    • Karthik Rangappa says:

      Ah, don’t read too much into the numbers. There are a few gaps in the narrative. I just want you to look at the overall flow and the sequence of events before the IPO happens.

  194. Shivasai Nelluri says:

    Why there is no ‘login with fb’?
    And the content is different on web and app.
    Make a feature that allows user to switch between PC and mobile simultaneously , by syncing the progress.

    • Karthik Rangappa says:

      You don’t need to login on web to read through the content. The content too is similar on both the web and app.

  195. Ankit says:

    Total no of shares in table of scene 4 should be 42 lacs not 44.50 Lacs.

  196. Jayashankara v says:

    hy Sir I am very Happy to use zerodha..
    thank you so much for this useful knowledge..

    but i have one small doubt..
    in 25,00,000 Shares how did you divide 7,00,000 shares to Venture Capital..

    25,00,000×14/100=3,50,000 how it comes 7,00,000 can you explain..🙏

    • Karthik Rangappa says:

      Its was just a random assignment, just to illustrate the concept. I’d suggest you don’t really get into the numbers, rather focus on the overall flow of the context.

  197. Nalin Rajput says:

    When we say the valuation of a company is X at a certain point of time, is the valuation calculated on the past profits and losses and other acquisitions of the company till that moment of time or it is calculated based on predicted profits and losses of the company till a certain amount of time in the future?

  198. Jayashankara v says:

    Thank you so much for the reply..
    i Have seen all questions,its really great You have given reply to each questions..
    Zerodha is a Number One Brokerage Company In India You are like Celebrity For sharemarketrs,you Give answers for everyone,its really great..🙏
    from Karnataka..
    hope you understand kannada..😊

  199. Jayashankara v says:

    nange share Markets bagge doubts iddu..nimna kelidre answers sigboda..
    nanobba rangabhumi kalavida(Theater Artist)..
    acting jothe sharemarket mele kooda interest bandide..

  200. jayashankara v says:

    Thank you so much

  201. Robin Sethi says:

    Hi Karthik,

    One question I have is as you mentioned that promoter and the angels raised a capital of Rs 5 crore and where issued shares for the same, but when I check the table I find out that the initial investment is made only of Rs. 2 crores from the promoter and Rs 25 lakhs each by both the angels. Then from where does Rs 2.5crore more come in to make it a business of Rs. 5 crores?

    • Karthik Rangappa says:

      Robin, the rest is valuation. I think someone had a similar query where I’v explain this. Can you please check?

  202. Robin Sethi says:

    I got it! I shouldn’t focus on numbers here. The process is what needs to be addressed.

  203. Aditya Singh says:

    Hi Zerodha Team,
    This is such an eye-opener. It is very simple to understand. Thank you so much!!


  204. Trinadh says:

    In the initial allottment of the shares in the above example. Promoter & 2Angels been allotted with 25Lakhs of shares with Face Value 10, which is worth of 2.5Cr. But, they all have invested 5Cr together.

    My question/doubt is why have they been together allotted with shares worth 2.5Cr where as their investment is 5Cr?

  205. sunil apte says:

    In Scene 4 – The Private Equity
    The Total of No of Shares going to 4,200,000 but you have mention 4,450,000 in that table?
    Do my calculation is wrong?

    • Karthik Rangappa says:

      Need to check. But skip the numbers, the idea is to get an overall perspective of how a company goes IPO.

  206. Nawazuddin Siddiqui says:

    In the first scene (Angel Investors), you have allocated a total of 25 lakh shares to promoter and the angels, that is, 25*10= 2.5 crores in share capital.
    But on the assets side of the business, there stands a total 5 crores in cash.
    Can you please tell where did the rest 2.5 crores, which according to you is retained by the company, stand in the balance sheet?

    • Karthik Rangappa says:

      That would be in the share capital. By the way, I’d suggest you read through this without getting into specifics, there could be few errors, but the idea is to get the overall flow of things.

  207. ishan says:

    hey, can i study for cfa using all of the modules?

    • Karthik Rangappa says:

      The modules here lay down a foundation, you can certainly use it. However, to clear CFA, you need to read through the CFA curriculum.

  208. ishan says:

    i didnt understand the ipo section very well. can someone help

  209. ishan thakur says:

    hi karthik, i didnt understand what is ipo and what is it used for and also what does equity mean ?

    • Karthik Rangappa says:

      I’d suggest you read through this and the next chapter completely, Ishan. It should clear up all your doubts.

  210. Pranav kumar says:

    Dear Sir,
    Could you please explain more on how you calculated the Authorised share capital of the company as Rs. 5 Crores, when instead the authorised capital can be any amount…
    Isn’t it so ?

  211. Pranav says:

    Sir please correct me if I am wrong,
    Authorised share capital is that amount which the company can raise capital at ‘maximum’, beyond that it cant raise or issue.
    However if it does want to increase the authorised capital ,then there is another process for that.
    So How can Rs.5 crores be the limit which it can raise?

    • Karthik Rangappa says:

      Yes, they can increase by passing a board resolution and amending the MOA and AOA of the company.

  212. Nagabhushan says:

    Sir, in the above example, when the VC came with a proposal of funding 7CR with 14% stake in the company, the evaluation of others stake increased 10 times… I would like to know how this increase happen? is it the promoter pumped in more money Or the increase in valuation amount is due to profits…? Plz clarify

  213. Jalansh says:


    I am new to this. I did not understand how there was a ten-fold growth after the series A funding. Can you please explain?

    Thanks in advance!


  214. Amit Bhardwaj says:

    Dear Sir,
    First of all I want to thank you fr this amazing study material.
    I have a doubt in this chapter.
    In the starting the seed funding was Rs. 5 Cr.
    But the shares issued were only of the value of Rs. 2.5 Cr.
    The promoter and angel investors funded Rs. 5 Cr. and only get shares of Rs. 2.5 Cr.
    Does that mean that company issued shares on premium?
    How will it be shown in the balance sheet of the company?

    • Karthik Rangappa says:

      Thanks, Amit. Yes, there was a premium considering it is a revenue-generating business. Also, as I’ve mentioned don’t sweat about the numbers in this chapter, just go through the narrative flow 🙂

  215. Amit Bhardwaj says:

    Thank you sir for the prompt reply.
    I know that the aim of this chapter is to give an understanding about how a company evolves and I am not stressing on numbers. I just wanted to know that why the promoter and angel investors settled for less shares than the money they actually invested. I can get it for the promoter.
    But I mean, if I were an angel investor of the company, I wouldn’t take shares worth say 5 lacs if I have invested more than 5 lacs in the company.
    Please help me understanding that.
    Thank you.

  216. Amit Bhardwaj says:

    Thank you sir. I appreciate your hard work in resolving query of each and every learner.

  217. Shashank says:

    Thank you for the article, Keep going! Also I had few doubts and as always after reading the comments it got cleared.
    One small suggestion I have, when more and more comments pitch in it is a bit difficult to read all comments and some form a chain as well. Again comments have valuable information and avoid you as a author to clarify same things again and again. Why not modify the comments format in a way so that users can check quickly? For eg.
    Comments involving ‘seed fund’ queries –
    Comments related to most asked queries –
    If you segregate in this way, at least 70 – 80 percent ppl will benefit who read the article after an year.
    Again this is not an impossible task but important articles should have these considerations for comments.

    • Karthik Rangappa says:

      Thanks Shashank. This is something that we have thought through. Will take this up with the team again.

  218. Sudarshan Praveen says:

    Hi i have a similar suggestion as stated by Shashank above
    If you guys can either pin point or colour code or give a reference in the main content about the important comments which provides additional information or value added points then it will be quicker and easier for the reader to go through it rather then going through the entire comments section.

    • Karthik Rangappa says:

      Thanks, I have suggested this as feedback to our tech team. Hopefully, we should get a solution soon.

  219. Sandip maru says:

    Hi Karthik,
    I have a small doubt..
    When initially, promoter and angel investers invest in business and allot share among themselves…
    1. how does they decide percentage of allocation..? Means who will get how many percentage and how much percentage to keep behind..?
    2. When VC comes in picture and invest lumsum amount for specific percentage of share… who will decide the valuation…? by which VC is alloted the share percentage..and same way when PE comes in picture, how the valuation of company decided…?
    3. Does the face value of share which was Rs.10 initially remains same when VC and PE comes in pucture..?
    Thanks in advance..
    Sandip maru

    • Karthik Rangappa says:

      Sandip, please look through the queries, lots of readers have asked the same before and its already discussed 🙂

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