4.1 – Overview
This chapter was updated on 15th November 2022. A few comments in the query section may seem out of place. Kindly ignore those comments. The essence of the chapter remains the same.
The initial three chapters set the background on basic market concepts you need to know. It becomes necessary to address a fundamental question at this stage – Why do companies go public? A good understanding of this topic lays a sound foundation for all future topics.
In this and the next chapter, we will learn about why companies go public and, in the process, also learn a few financial concepts.
4.2 – Origin of a Business
Before we seek an answer as to why companies go public, let us figure out a basic concept – the origins of a typical business. We will build a familiar story around this concept to understand IPOs better. Let us split this story into several scenes to understand how the business and the funding environment evolve and the circumstances that lead a company to list in the public market.
Scene 1 – The Angels
Let us start our story. Imagine a passionate entrepreneur with a business idea – to manufacture highly fashionable, organic cotton t-shirts. The designs are unique, priced attractive, and the best quality cotton is used to manufacture these t-shirts. The entrepreneur is confident that the business will click and is enthusiastic about starting the business.
As you’d imagine, the entrepreneur will face a typical problem – how to fund the idea? Assuming the entrepreneur has no business background, he/she will not attract any serious investors initially. Chances are, the entrepreneur will approach the family and immediate friends to pitch the idea and raise some money.
Let us assume that the entrepreneur pools some of his money and convinces two good friends to invest in his business. These two friends invest in the business based on their trust in their friends. The two friends in this context are referred to as the Angel investors. Please note that angel money is not a loan but an investment in the business.
So let us imagine that the promoter (entrepreneur) and the angels raise INR 5 Crore in capital. This initial money the business gets to kick start operations is called ‘The Seed Fund.’ Sometimes, it is also called a ‘Friend & Family round.’ It is important to note that the seed fund will not sit in the entrepreneur’s bank account but the company’s bank account.
Angel funding need not always come from friends; there are professional angel investors who invest money in companies that they think are good.
In return for the initial seed investment, the original three (promoter plus two angels) will be issued share certificates of the company, which entitles them to certain ownership. The only asset that the company has at this stage is cash. Hence the value of the company is only to the extent of the cash they own. In this case, the valuation is 5Crs. Of course, one can argue that the company’s value is cash plus the company’s unique business idea, and therefore the valuation is beyond 5Crs, but we will not get into that.
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 between Rs.1 to sometimes even above Rs.10 per share as restricted by SEBI DIB guidelines to protect investors. If the FV is Rs.5, the number of shares would be one crore, and so on.
Backed by the seed fund, the promoter kick-starts business operations. The entrepreneur moves cautiously, hires the right people, establishes the right process, and starts manufacturing high-quality t-shirts. At this stage, the entrepreneur has one small manufacturing unit and one store to retail the product.
Scene 2 – The Venture Capitalist
The entrepreneur’s hard work pays off, and the business generates a steady revenue stream. The company starts to break even at the end of the first two years of operations. The promoter is no longer a rookie business owner. Instead, he is more knowledgeable about the business and, of course, more confident. Backed by confidence, the promoter wants to expand the business by adding one more manufacturing unit and a few additional retail stores in the city. The entrepreneur chalks out the plan and figures out that the fresh investment needed for business expansion is INR 7 Crs.
The entrepreneur is now in a better situation when compared to two years ago. The big difference is the fact that the business is generating revenues. The healthy inflow of revenue validates the business and its offerings. The entrepreneur can now access reasonably savvy investors for investing in the business. 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.
Assume the entrepreneur raises the 7 Crs required to expand the business. Typically when new investment flows into the business, the following happens –
- There is a dilution of shares by the promoter.
- The valuation of the business increases
- All the previous investors (in this case, the two angles) tend to make notional profits on their initial investment.
With the VC’s money coming into the business, the notional value (valuation) increases, and therefore, notional wealth is created for early investors.
As we advance with our story, the promoter now has the capital required for the business. As planned, the company gets an additional manufacturing unit and a few more retail outlets in the city. Things are going great; the product’s popularity is growing, translating into higher revenues. The management team gets more professional, thereby increasing operational efficiency, which 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 three more cities. To back the retail presence across three cities, the company plans to increase its 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 a few options for the company to raise the required funds for their CAPEX:
- 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.
- The company can approach another VC and raise another round of VC funding by allotting shares; if they do, it’s called series B funding.
- The company can approach a bank for 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.’
Assume the company exercises all three options to raise funds for Capex. It plows back 15Crs from internal accruals, plans a series B – divests some equity for a consideration of 10Crs from another VC, and raises 15Crs debt from the bank.
Note that the company’s valuation again increases with 10Crs coming in from series B. With the increase in valuations, the previous investors tend to make bigger notional profits. Also, I would encourage you to think about the wealth created over the years. This is exactly what happens to entrepreneurs with great business ideas and a highly competent management team.
Real-world examples of such wealth creation stories are companies like Infosys, Page Industries, Eicher Motors, Titan Industries, Bajaj Finserve, HDFC Bank, and internationally, one could think of Google, Apple, Amazon, etc. The list is quite exhaustive.
Scene 4 – The Private Equity
A few years pass by, and the company’s success continues to grow, and with the growing success of this 8-year-old company, ambitions swell. The company decides to raise the bar and branch out across the country. They also diversify the company by manufacturing and retailing fashion accessories, designer cosmetics, and perfumes.
The CAPEX requirement to fuel 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, bites into the company’s profits. For example, suppose the company generates Rs.100 as profit and pays Rs.20 towards finance charges; the profitability is reduced to Rs.80. We will discuss more on this in the Fundamental Analysis module.
The company decides on 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. Think about the PE as a big brother of a VC. Here are a few differences between a PE and VC –
- VCs tend to cut smaller cheques, while PE typically invests large amounts.
- VC invests in early-stage businesses and takes a much higher risk than PE. PEs invest at a mature stage and take on lesser risk compared to a VC
- PEs, upon investment, also take up a board seat in the company and oversee the company’s functioning.
PE investors are quite savvy. They are highly qualified and have an excellent professional backgrounds. They invest large amounts of money to provide the capital for constructive use and place their people on the board of the investee company to ensure the company steers in the required direction.
Usually, when a PE invests, they invest in funding 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 have been in operation for a few years. Deploying the PE capital and utilizing the capital for the CAPEX requirements takes a few years.
Let us assume that the company raises funds via a Private Equity company and expands its business.
Scene 5 – The IPO
Fast forward 5 years after the PE investment, the company has progressed well. They have successfully diversified their product portfolio and have a presence across all the country’s major cities. 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! The company now wants the brand available across all the major international cities, with at least two outlets in each major city worldwide.
The company needs to invest in market research to understand the demographics of other countries, invest in people, and increase manufacturing capacities. Besides, they also need to invest in real estate space across the world. The CAPEX requirement is huge; the management estimates this at 200 Crs. The company has few options to fund the CAPEX requirement –
-
- Fund Capex from internal accruals
- Raise Series D from another PE fund
- Raise debt from bankers
- Float a bond (this is another form of raising debt)
- File for an Initial Public Offer (IPO)
- A combination of all the above
For convenience, let us assume the company decides to fund the CAPEX partly through internal accruals and the rest via an IPO. When a company files for an IPO, they have to offer its 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 offers the shares for the first time to the public, it is called the “Initial Public Offer’.
We are now at a crucial juncture where a few questions need to be answered.
-
- Why did the company decide to file for an IPO? In general, why do companies go public?
- Why did they not file for the IPO when they were in Series A, B, and C situations?
- What would happen to the existing shareholders after the IPO?
- What does the general public look for before they subscribe to the IPO?
- How does the IPO process evolve?
- Which of the financial intermediaries are involved in the IPO markets?
- 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 into the IPO Market. Hopefully, from this chapter, you should have developed a sense of the sequence of events that would typically drive a company to raise funds via an IPO.
Key takeaways from this chapter
- Before understanding why companies go public, it is important to understand the origin of business.
- The people who invest in your business in the pre-revenue stage are called Angel Investors.
- Angel investors take the maximum risk. They take in as much risk as the promoter.
- The money that angels give to start the business is called the seed fund.
- Angel’s invests a relatively small amount of capital
- The valuation of a company signifies how much the company is valued by considering the company’s assets, liabilities, and future growth prospects.
- Face value is simply a denominator to indicate how much one share is originally worth. Face value is also called the notional value of a share.
- The money the company spends on business expansion is called capital expenditure or CAPEX
- Series A, B, and C are funding the company seeks as it evolves. Usually, the newer the series, the higher the company’s valuation.
- Beyond a certain size, VCs dont invest, and hence the company seeking investments will have to approach Private Equity firms.
- PE firms invest large sums of money, usually at a slightly more mature stage of the business.
- In terms of risk, PEs have a lower risk appetite as compared to VCs or angels.
- Typical PE investors post their people on the investee company’s board to ensure business moves in the right direction.
- The company’s valuation increases as and when the business, revenues, and profitability increase.
- An IPO is a process using which a company can raise funds from the general public. The funds raised can be for any valid reason – for CAPEX, restructuring debt, rewarding shareholders, etc
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?
Because the company is not listed yet, the valuation is based on the transaction value of private investors (Angels, Ventures, PE etc).
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.
Sure Sir, I’ll remember that 🙂
please i have a request to you that please mention share delusion or dilute shares or please inform where i can get these topic
We will add a supplementary note on this in FA module soon.
Hey,
How can we know when you people added new content?
I wanna learn a lot. Is there any mail we get whenever you add something?
Can you please point to that?
I dont wanna miss anything
Follow us on twitter – every new chapter gets announced here – https://twitter.com/ZerodhaVarsity
sir, can u check all the tables one more time. i am getting miscalculations
Sure.
In PE series C the number of shares must be 700,000.
Let me recheck, but as I have mentioned in the chapter, don’t read too much into the numbers. This is just to give you an idea about the flow of events.
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 “
Thanks so much for pointing this out, I have made the necessary edit.
Hi, karthik, please edit this ” Assuming they pick up 15% stake for a consideration of 60Crs, they are now valuing the company at 400Crs, no. of shares should be 15% of 50lakh i.e. 750,000 not 1,000,000 as mentioned in the table after.
Thanks Renu, let me check this.
Yeah.. this is a miscalculation in the table. It actually got me confused too. This is should be 750,000 and not 1,000,000
Lemme check, thanks.
It is still appearing as 1000000 instead of 750000?
Will look at this.
I agree with your point
Sir, the calculation given as 31% equivalent to 62 Cr. is correct, which mentioned in your article…..
Thanks for providing such good articles which i never find anywherelse
Cheers!
Thanks
Karthik, what is mean by floating the bonds? again is it like debt offering @ some % interest ?
Yes, it is just that. ‘Floating a bond’ is just a jargon.
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 !
Thanks for pointing this :). Will make the necessary changes.
Hi Karthik, The article is quite simplified and helpful for newbies like me.
Just a confusion regarding In Scene 4, PE series C holding% is 15% , hence no. of shares should be 750,000 instead of 1,000,000. It seems to be confusing.
Let me check that, Rakhi. Thanks.
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
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 🙂
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… 🙂
Thanks Omkar. Please do help us reach out to more people and have them educated on concepts related to stock markets!
Thank you keep it up Good work indeed.
does the face value also increases ?????
It can, companies opt for it on very rare occasions.
on which circumstances & how it changes the whole scenario????
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.
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?
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.
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?
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.
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
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.
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”.
Thanks for pointing this, looks like some confusion here. Let me recheck the whole thing.
Thank you for pointing out the mistake. We have made the necessary corrections.
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??
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.
thanks, that cleared it
I really appreciate the work you have put in and for the promt reply.
🙂
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 ?
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.
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?
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.
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.
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 .
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.
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.
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!!!
Thanks, good to know that 🙂
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.
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 🙂
Thanks for the kind words Pratap, needless to say there is a small team behind Varsity and the credit goes for all 🙂
Sir, i didn’t understood the how valuation is done , please help.
Everything related to valuation (DCF) is explained in Chapter 14 & 15 of the FA module – http://zerodha.com/varsity/module/fundamental-analysis/ . Request you to go through the same.
thanks sir……..
Welcome 🙂
HI
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.
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.
Thankyou very much karthik…. I am missing a super like button here 😉
We will consider your comment as a super like 🙂
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.
For that we will have to dig deeper into cashflows 🙂 The idea here was to kind of establish how companies go IPO.
Okay. Got the point.
Cheers!
.
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.
Yes, valuation reflects the future business prospects of the company along with its earning potential. This is what you pay for.
Hi,
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?
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.
Is this what you call a stock split. When they say the stock is split 1:1 shouldn’t the value of the share decrease by half?
No stock split is corporate action where you decrease the Face value of a share…maybe from Rs.10 to Rs.5. When the stock gets split, the value is proportionately reduced.
How do the company increase share capital? can you please explain!!!
By issuing new shares. From the balance sheet perspective, reserves will reduce, share capital will increase, hence the balance sheet still continues to be balanced. You can read more about the balance sheet here – http://zerodha.com/varsity/chapter/understanding-balance-sheet-statement-part-1/
Ok. So wouldn’t that make shareholders angry? By decreasing the value of their stock?
No in fact the net investment remains the same – check this http://zerodha.com/varsity/chapter/five-corporate-actions-and-its-impact-on-stock-prices/ (section 11.4).
Is there any correlation between seed capital of promotor/angel investors with respect to percentage share they own?
The higher they invest, the harder they would negotiate for a larger stake.
[…] starts but still makes good money. If you want to read further about this procedure, please visit http://zerodha.com/varsity/chapter/the-ipo-markets-part-1/ .You might ask me how, but that is a topic for the future articles. Trust me, you don’t […]
[…] starts but still makes good money(If you want to read further about this procedure, please visit http://zerodha.com/varsity/chapter/the-ipo-markets-part-1/ ) .You might ask me how, but that is a topic for the future articles. Trust me, you don’t […]
[…] starts but still makes good money(If you want to read further about this procedure, please visit http://zerodha.com/varsity/chapter/the-ipo-markets-part-1/ ) .You might ask me how, but that is a topic for the future articles. Trust me, you don’t […]
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.
Some mistakes in question, 4.5 crs from Promoter and 50 lack from angel investors.
Like I mentioned previously, they are in authorized but not yet allotted.
The shares are in reserve Sagar, yet to be allocated.
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%.
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.
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)”
Thanks, will look through again.
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?
Check the tables Prattham, the wealth created coloums should give you an idea.
Hi,
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.
Thanks,
Shyam
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.
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 ?
1) Check this – http://www.nseindia.com/products/content/equities/ipos/historical_ipo.htm
2) About 15 days
how long does it take for bonds and govt. securities to land in secondary market , after they are sold-off in primary market ?
for example NHAI bond were issued on 17th december 2015 , when exactly will we find these bonds on NSE ?
I’m not really sure about this, my guess would be about 15 days – similar to IPO markets…although I could be wrong.
HOW TO BUY IPO IN KITE.ZERODHA.COM, tell me about this in details
Its not yet possible, but will happen soon.
It seem more than 1 year has been passed….
So do we have facility in Kite to apply an IPO?
You can use Zerodha for IPOs, check this – https://tradingqna.com/t/how-to-buy-d-mart-ipo/10597
Hi Karthik, please enable indexing option file exporting pdf. That would help us to jump between chapters/headings easily.
Sure, will keep this in mind for the future PFDs.
PE series C should be 750,000 shares to make 15% not 1000,000 shares.
Thanks for the nice explanation
Cheers, will look into the explanation again.
Hi, How does the valuation increase suddenly from 50 crs to 200 crs? Kindly explain
As the companies revenues and profitability increases, the valuation also increases.
Can the startups keep any face value they want?? what are the limitations for such values & who sets them??
Yes, they can keep any value they want. Usually the company’s CA takes a call on this.
CA stands for?? (sounds silly i know..)
Chartered Accountant 🙂
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
Check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/pre-marketpost-marketafter-market-orders
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
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.
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
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).
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)?
Abhishek, its best if you treat this example to get the gist of the matter and not go into actual numbers 🙂
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 ????
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.
When we can apply for IPO via zerodha?
Hopefully soon 🙂
“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
If 14% of the business is valued at 7Cr, then at this rate 100% of business must be worth 50Cr.
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
Yes, that is also possible, Divyesh. In fact, there are many different models based on which VCs/PEs values companies and invest.
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?
Well, end of the day, valuation is just a perception…you value a company based on what you perceive its worth to be!
Hi Karthik,
now i am getting an essence of how its valuated, as you said its valuation is just a perception, if then why valuate 14% @ 50 CR, what happens if a company starts valuation say 7cr funding at 1% and valuation will be even more. does any one regulate this?
Nope, no regulation.
I have a doubt ie in initial stage total capital was 5cr but allotted share capital was only 3cr .what about remaining 2cr
Thats in reserve.
Great article! Presented in a very simple way.
Thanks, happy to know you liked it.
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 ?? ..
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.
Hi karthik, please reply me soon. I am waiting for your answer. I need to clarifies all my doubts before investing into stock markets.
Sure, but what is your doubt?
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 ?? ..
Renu, I have already posted an answer for this. Can you please check?
Sir
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.
Yes, you are kind of right when you say issued capital is a subset of authorized capital.
The structure and dilution really depends upon the promoters (and investors) and varies company to company.
Thanks Karthik
Welcome!
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.
Q1
sir, why not promoter hold 51% to maintain his ownership in company for a long time.
Q2`
sir please tell in detail about broad of directors.
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 🙂
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?
Thanks
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.
can we say that stock market provides company to get capital, is called ”I.P.O.”
Yes Sir, you got that right.
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
2 Crs each.
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 ?
It was not paid up. Paid up was only to the extend of shares issued.
How to subscribe to IPO from Kite?
You cannot apply for IPOs via Zerodha (for now).
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 ?
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.
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 ?
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.
Thanks guys for the nice articles. Does that mean face value of the share will be changing based on the valuation of the company?
Not really, FV changes based on the corporate action such as splits and bonuses.
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 🙂
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?
Not as of now.
Hi…
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.
The valuations are based on how investors perceive the company and invest in it.
same here !!! I too haven’t understood the leap in valuation from 5 crores to 50 crores
Please do check the previous reply. Thanks.
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
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.
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.
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?
Yes, somewhat.
Who decide the “face value (FV)” of of a share? SEBI, The Promoter and angles itself or who??
Promoters.
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
At the stage of going IOP, the money goes to the people off loading the shares via the subscription mechanism.
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.
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.
“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.
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
Happy to know that 🙂
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
Certainly, portfolio management is a topic we will consider to write about very soon.
thank you
can a individual person can buy a stock at face value
No, it is highly unlikely a stock will be available at face value, especially if it is a good quality company.
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.
Let me check this, thanks for pointing.
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?
Yes.
Hello,
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??
Can I buy a stock at face value at portfolio management
You can buy the stock at a price at which its trading, so if it is trading at FV, then of course you can.
Can you say some stock trading at face value
Cant think of any at this stage.
How to buy foreign stocks
How to know how many stocks are available in the company
Number of outstanding shares is mentioned in the annual report.
can a person residing @ india can trade on jpyusd eurusd pairs
It’s not available yet. Hopefully sometime soon.
a person residing @ india can do oversea stock currency trade
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.
I have a zerodha trading account. How can I invest in IPO ?
Please guide.
We do not have the facility for that yet. However, if you have a Zerodha Demat account, then you can always give the DP details while applying for the IPO. Check this – https://tradingqna.com/t/how-to-apply-for-cafe-coffee-day-ipo/4237
Hello,
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.
Thanks
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.
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 🙂
We had that feature earlier, but for some reasons it has been disabled. Will check with my team about this anyway. Thanks.
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.
You need to check this – https://www.youtube.com/watch?v=32waPupaXGg
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!
Thanks for the kind words, Anindya 🙂
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.
1) Not sure Kumar However, please do follow this thread – https://tradingqna.com/t/how-to-buy-d-mart-ipo/10597
2) No, you will have to use 5 different DEMAT. One DEMAT, one bid
3) Allotment will be on a lottery basis, no guarantees here
4) Yes for both.
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.
Please do check this webinar – https://www.youtube.com/watch?v=32waPupaXGg
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
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.
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.
Its decided on a mutual consent between the promoter and investors.
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/- ?
FV can remain the same. It changes, only if there is a corporate action – like bonus, split etc.
Greetings,
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
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.
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 ?
Pratik, if 14% is valued at 7 Crs, then 100% is valued at 50 Crs.
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.
Possible, let me relook at the numbers. Thanks for pointing it out. However, the focus at this stage was just to convey the concept.
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?
Because the business prospects have improved and therefore the valuation of the company.
thank you sir!
Welcome!
Hi,
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.
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 🙂
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.
Its best if you open a Trading + DEMAT account with us for a seamless experience.
At time of funding new valuation of company is decided. How is it done? Can you name factors affecting that?
Revenue, growth, industry prospects etc.
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
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.
Hi,
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.
I’d suggest you start with our very first module – https://zerodha.com/varsity/module/introduction-to-stock-markets/
What is the minimum investment for venture capitalist and private equity
Venture capitalists /private equity they can able to become board member or not
Not really sure, Perumal. If you are talking about PE investment, I’m assuming it will be a couple of million USD.
Then what about venture capitalists
Much lesser….maybe in the range of a couple of INR Crs.
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?
You will have to purchase it in the prescribed lots.
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.. 🙂
I’m glad you like it Pratish, happy learning 🙂
Hello sir I like to do Forex trade on some international stock exchange what should I do to open a trading account
I’m not sure if this is permitted by RBI. I’d suggest you trade the currency pair on NSE.
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?
It’s a mix of math + finance + goodwill.
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
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.
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.
Thanks, Bhaskar.
Good luck and happy learning.
How company valuation increased 10 times after 7 Cr investment by VC.
Can you please elaborate this valuation.
Guess, it’s already done in the chapter.
“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.”
Sir, what is your take on seven hills-ipohttp://ipobaba.com/ipo/seven-hills-beverages-ltd/
Should I subscribed??
Not sure, Niranjan 🙂
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.
I’m happy to know you liked it, Pankaj. Hope you will like the Varsity experience going forward as well 🙂
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.
It will be known. Profits will be allocated as per the share holding….balance will be parked in reserves.
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
Logic is simple – If 14% of something is worth 7 Crores, then 100% of the same thing is valued at 50 Crs.
This value elevation is result of confidence in the business OR the favorable market condition OR early success.
A mix of all, but predominantly results.
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?
And
2) Help me to understand the valuation of company, I still can’t get it after reading some comments.
1) The profits are to the extent of the shares held
2) Which part is confusing? Can you kindly elaborate?
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%.
This is based on the valuations of the company, Suresh.
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%.
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 .
They vary based on company to company.
thnx
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?
I’d request you to run through the comments as well, Suresh. Thanks.
What is the difference between ofs and fpo and ipo
Ah, thats nice. Will probably put up a note on this.
karthik ji where r the answers of last 7 questions
Not sure if I have missed any questions. Have been answering all of them promptly!
kk can u plz tell me Why did they(companies) not file for the IPO when they were in Series A, B and C situation?
That is too early for any company to file for an IPO. The IPO valuation will be juicy when the company has spent enough time doing business and witnessed business cycles.
Sir,
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 ?
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.
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 ?).
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.
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.
Ah! That would be tricky as these are unlisted companies.
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?
Its best if they provide money and leave the rest to the promoter, but they seldom do 🙂
Excellent work with Varsity Karthik Rangappa . Even a newbie can understand all the chapters , very well written thumbs up 🙂
Cheers! Happy learning 🙂
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
They won’t remove it from the exchange, rather they will move it to a lower category of stocks, like maybe the Z group.
Hats off to the author. So clearly written!
Glad you liked the content 🙂
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?
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!
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.
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?
Fantastic explanation..!! I have a query. Valuation does not mean capital right? Its just like brand value is it?
It means the value of the underlying business. In simple words, it is how much you would pay to buy out a business completely.
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.
The share capital is an integral part of the balance sheet. It is shown in the equity (or liabilities) side of the balance sheet.
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%”.
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 🙂
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.
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.
Sir,
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?
For intraday leverage provided, there is no interest charged.
This video should help you understand the funds aspect on Kite.
Margin Statement is basically an update on daily margin positions, you can read more here
Awesome. Super Like.
Concept wise full clear.
Cheers! Happy learning.
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?
Yes, this is possible.
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)?
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.
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) ?
Glad you liked the content, Arun.
Yes, at an initial valuation of 5CR, these numbers are valid.
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.
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.
“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?
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.
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?
Hmm, I should have probably extended the storyline a bit more 🙂
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?
Regards
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.
Great work guys☺️. U guys made it simple to understand.
Happy learning, Chandru 🙂
I keep seeing these msg when i trade, what is the reason for this.
RMS:Blocked for 509631 bse_cm HEG MIS block type: ALL
RMS:Blocked for nse_cm HEG-EQ MIS block type: ALL
Thanks
We don’t provide leverage for the stock you are trading, you can trade such stocks only in CNC. Check our Margin Calculator for the list of stocks we provide leverage
Check this please – https://tradingqna.com/c/zerodha/zerodha-order-rejection-reasons
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??
Well, the perspective is on valuations and future growth, Arnav.
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.
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.
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?
Let me check again. Thanks.
So sir, did you check?
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?
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.
Sir, you’ve not replied to my question yet. Check last third comment please.
Amit, I dont see that data. Also, I guess its explained in the chapter. Can you please give it another read? Thanks. The idea is to just understand the flow and not really get caught with the numbers.
Okay, thanks! I’ll
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. ?
The valaution is based on the future business prospects. I’ve discussed this in the chapter.
7 cr was invested at 14% shares. So you can count 100% share value. 🙂
What is the difference between VC and PE ?
A VC’s risk appetite is much larger compared to a PE. Also, VC’s typically invest smaller amounts when compared to a PE.
Got it.
Please add a feature :- When you or someone else reply us we should get email.
We have disabled it as the comments run into few 100’s and ppl kind of get spammed.
i am not able to find the stock for icicisecurities and mishra dhatu post ipo listing ,till date..pl clarify what is the process of ipo trading in zerodha kite after they are listed
Ashish, can you search for ISEC(ICICI Securities) and MIDHANI(Mishra Dhatu Nigam) to find the scrips?
thanks but i was searching by full name..how to know the listed shortname on kite
[…] Let us know Why do companies go Public? […]
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?
This is really upto the management, Vamsi.
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.
Let me check this, Ashish.
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 ??
If 14% is valued at 7, then by that measure 100% is valued at 50.
Great sir, i understand whole scenario, suppose companies have little number of share, how can increase it ?
It is an accounting concern, can be done by increasing the share capital.
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?
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.
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??
It will be the same unless the company has given out a bonus or split.
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.
Khurshid, what is the point of giving 100%? What incentive would the promoter have to conduct business?
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?
Happy to note that, Sunil. Yes, largely the % depends on the amount invested.
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?
There is no liability as such when shares are issued you are a partner in the business.
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.
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.
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 ?
They can do so either by finding another buyer for their shares or by offering their shares to the public.
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 ?
The company, in that case, can do a ‘Follow-on Public Offer’.
When all the shares are sold out.Whose Shares will be sold in Follow on Public Offer ?
The promoters can offload a part of their holdings.
Pramoters are just like other shareholders , When Promoters sell their stake .It will go into their Personal accounts.The company will not get any additional capital.
Yes, but their activity does have a big impact on shareholder sentiments.
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)
They can issue fresh shares by diluting their equity.
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.
Thanks, Pankaj.
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?
On a lottery basis.
there is no formal method to distribute the shares?
Via an IPO 🙂
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!
Hi,
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.
Its simple math, Mohit – if 7% of an asset is valued @ 14 Cr, then 100% of the same asset should be 50Cr.
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 ?
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.
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.
Let me re read this artile and get back to you 🙂
Very crisp and knowledgeable!
Happy learning 🙂
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.
Anshul, I’ve not that yet. But I guess your explanation is right.
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?
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!
Yes, valuation is a function of future growth right? So that gets factored in and hence the valuation increases.
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. ” ?
Thanush, yes, these are the initial set of shares. Authorized but not allotted implies that the shares are not issued to anyone.
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?
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.
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.
Yes Sir.
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
Sriram, the decision to but either 10% or 14% is entirely upto the VC. This depends on the perceived valuations of the company.
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,!
Think of it as not being created.
Hii Sir
When PE bought 15% stake in company, no of shares are 7,50,000 please correct that.
Yes.
Can you please explain how is a company valued ?
Here is an entire module on that – https://zerodha.com/varsity/module/fundamental-analysis/
Kartik, can u explain the calculation of valuation?
From 5cr to 400cr
Akib, for a detailed view on valuations, I’d suggest you look at this module – https://zerodha.com/varsity/module/fundamental-analysis/
Very good explanation
great
hi,
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
Angle investors just fund the business, promoters run the business.
“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?
Please read the comments, its explained several times.
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?
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?
Somil, how can just investment without operations drive the profits?
The 7 was new investment. Also, I’d suggest you run through the comments, Somil.
A very simple narrative and to the point. Awesome work,Thank you !
Happy reading!
Wow, the simplicity of your explanation is insane !! Thank you.
How is the company valued if some investments are undisclosed?
Hey thanks, Advait 🙂
If they are undisclosed, then it becomes an issue for outsiders and you cannot get a fair sense of true value.
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
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.
Amazing way to explain how businesses work and grow! Thank you for this.
Happy reading, Ganesh!
Hi
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.
Thanks
Suraj, I’m glad you are liking Varsity!
The valuation bit is simple math – if 14% is valued @ 7Cr, then 100% is valued @ 50%.
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?
Pravan, yes there are inconsistencies in the narrative, and this is not the way an actual deal would take place. However, the idea here is not to showcase how the deal takes place but rather emphasize the events leading to an IPO.
Okay, thank you.
Happy reading, Pranav!
Where can i read about valuation?
After the basic modules on Varsity of course
Karthik suggested this book somewhere in comments. I will let him answer on this more
“The Little Book of Valuation” ~ Aswath Damodaran
Thats the direction I am heading
Yeah, that’s a fantastic book.
Thats a huge topic, Vijayant. You need to identify what exactly you need to know before proceeding. I’d suggest you start with this – https://zerodha.com/varsity/module/fundamental-analysis/
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 !
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.
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)?
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 🙂
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
Its a pleasure, Shashikiran.
Hi,
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.
There are few conceptual errors in this (mainly on the accounting side), however, the idea here is to just illustrate the sequence of events that leads to a companies IPO. The balance sheet itself is explained in details here – https://zerodha.com/varsity/module/fundamental-analysis/
Yes!
Thank You.
Happy trading!
Superb Explanation…
Thankyou….
Happy reading!
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?
If 14% of the business is 7Cr, 100% of the business is 50 Cr.
PLEASE WRITE THE CONTENTS IN HINDI LANGUAGE TOO.
The content is already available in Hindi, check this – https://zerodha.com/varsity/module/%e0%a4%b6%e0%a5%87%e0%a4%af%e0%a4%b0-%e0%a4%ac%e0%a4%be%e0%a4%9c%e0%a4%be%e0%a4%b0-%e0%a4%b8%e0%a5%87-%e0%a4%aa%e0%a4%b0%e0%a4%bf%e0%a4%9a%e0%a4%af/
Why valuation of a company will come down when additional shares are issued?
More dilution right?
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?
Based on the clause, the merchant banker may or may not have to subscribe to the shares.
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?
It also depends on the value of 10K shares right?
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
Thanks for the kind words. Getting quality translation can be a challenge, however we are at it, lets see how that goes.
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??
Funds will come from the Liquidation of assets.
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?
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 🙂
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
Girish, you may be right. Let me double-check this, please. Thanks.
Thank You Sir.
Welcome!
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
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.
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?
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.
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?
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?
Thank you!
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 ?
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?
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.
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.
You don’t need to login on web to read through the content. The content too is similar on both the web and app.
Total no of shares in table of scene 4 should be 42 lacs not 44.50 Lacs.
Cool, let me double-check this.
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..🙏
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.
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?
The valuation technique assumes both the past data and expected growth. So it is a mix of both.
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..😊
Thanks for the kind words 🙂
Yes, I understand Kannada fully 🙂
thanks.
nange share Markets bagge doubts iddu..nimna kelidre answers sigboda..
nanobba rangabhumi kalavida(Theater Artist)..
acting jothe sharemarket mele kooda interest bandide..
Yes, please do feel free to ask all your doubts here, will be happy to help you with it 🙂
Thank you so much
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?
Robin, the rest is valuation. I think someone had a similar query where I’v explain this. Can you please check?
I got it! I shouldn’t focus on numbers here. The process is what needs to be addressed.
True, because I’ve oversimplified many things to help readers get an overall perspective 🙂
Hi Zerodha Team,
This is such an eye-opener. It is very simple to understand. Thank you so much!!
Aditya
Happy reading 🙂
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?
Trinadh, its been addressed in the comments, request you to please read up on the comments.
Hi,
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?
Need to check. But skip the numbers, the idea is to get an overall perspective of how a company goes IPO.
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?
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.
hey, can i study for cfa using all of the modules?
The modules here lay down a foundation, you can certainly use it. However, to clear CFA, you need to read through the CFA curriculum.
i didnt understand the ipo section very well. can someone help
Which part, Ishan?
hi karthik, i didnt understand what is ipo and what is it used for and also what does equity mean ?
I’d suggest you read through this and the next chapter completely, Ishan. It should clear up all your doubts.
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 ?
Depends on the capital the promoters bring in right?
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?
Yes, they can increase by passing a board resolution and amending the MOA and AOA of the company.
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
It is notional increase in valuations, not actual 🙂
Hi,
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!
Jalansh
Its explained in the chapter + comments section, can you please look that? Thanks.
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?
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 🙂
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.
Hmm, let me relook at this in case I’ve messed this up 🙂
Thank you sir. I appreciate your hard work in resolving query of each and every learner.
Happy learning, Amit.
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.
Thanks Shashank. This is something that we have thought through. Will take this up with the team again.
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.
Thanks, I have suggested this as feedback to our tech team. Hopefully, we should get a solution soon.
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
Sandip, please look through the queries, lots of readers have asked the same before and its already discussed 🙂
Dear Sir/ Madam
in scene 3 can you please explain to me the concept of the valuation. I am not able to understand the moth for how the valuation works???
Is there anything in particular that you are unable at get, I’ll be able to help with specific. Also, its best if you get a general idea on this rather than going into specifics. Thanks.
I didn’t understood the allotment of shares to the angels and promoters at beginning of company. Let’s make the easy example- I start a company and I put 50 rupees in it and friend puts 50 rupees(small amount for sake of simplicity). so now 1 share is worth Rs1 so there are total 100 shares.
now the alottment of shares is like 30 shares to me and 30 shares to my friend making total alottment to 60 shares.
So question is how much money do I have, my friend have and the company have?
thank you in advance😊
In reality, both of you have 50 shares each. So total shares are 100, both own 50%. So t’row if an angel investor comes, you will have to issue assume 20 shares. So now the total is 120 shares, your ownership is 50/120 or 41.66%.
where did 20 shares come from, and I thought my friend is angel investor
These are newly issued shares.
Hi Karthik,
Have a question:
You say: “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.”
Then you go on to say “only 25,00,000 shares are issues out of the 50,00,000 authorized shares.” Since the valuation at this stage is only 5cr, by issuing 25 lakh shares the angel investors (also the promoter) are getting share certificates worth only half of the value they invested. Isnt it? How this can be justified? Will the angel investors look at the future potential and accept this? How does this happen in practically?
I think is query is already addressed in the comments section. Can you please check once? Thanks.
How companies valuation goes to 50 cr after vc invest 14% stake in company by paying 7cr? Can you please explain this. Like how its calculate and all?
Request you to look at the explanations in the comments please.
👌
when the company had 5Cr then valuation was 5Cr, and when VC added 7Cr for 14% shares in the company, how come VC valued the company at 50cr? I’m confused with the line ” 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 it increase 10 fold with 7cr investment?
If 7Cr is valued at 14% of the company, how much is 100% valued at?
actually I read all comments after posting my question, got the point about valuation. I would suggest as you explained in the comments (about this 14% investment with 7cr and how did it fold/valued at 100%), you can edit that in paragraph itself so that no one might not need to go and search comments for the answer to query because all novice ppl may be reading this for the first time, like me.
Thanks, will do that Dev.
Hey Karthik,
Loved the Varsity app for Android. The content, the way the entire modules are designed, the quizzes, it’s wonderful.
However i prefer to read on Laptop compared to my phone, I have already completed some modules on the Varsity Web page but i cannot see a way to synchronize the read status from my laptop to the app, there is no login feature on the Web Page, or is it available and am I missing something?
Do you plan to integrate the Web Page with the Varsity app to save the module completion status across all the apps?
Cheers
Amith 🙂
Web and app are not integrated as the content presentation is different. But let me check with the team to see what’s possible on this front. Thanks.
The way you write!
There is nothing one can not understand. It’s quite intelligible. Thank you.
Happy reading, Jaipal!
Thanks so much Kartik sir. You give hope that I can learn share market and become a investor.
Thanks.
Happy learning, Danita 🙂
Hey Karthik, Great article! Explains all the funding rounds very nicely.
I didn’t understand the starting point though, i.e., “the balance of 50% of the shares totaling 2,500,000 equity shares is retained by the company”. When the promoter + angels raised a seed round of 5 Crores, shouldn’t they be owning the entire 100% of the company, and then in subsequent rounds their shares get diluted? Is it meant that in this approach personal equity shares are allocated and they never get diluted?
Glad you liked the content 🙂
It gets diluted, Shakti. It depends on how the funding requirements change over time.
Very clear and simple information given in layman style for anyone to understand , keep going and add new information on every topic related to Stock and shares….So that every one is free from unwanted brokerage charges and losses….In addition will help people get financial freedom in these covid times and also be efficient trader as they gain experience…
Thank you once again Zerodha Team for the effort ..really appreciated
Thanks for the kind words, Rajaraman. Happy learning!
in one of the figures u shown, VC of series A gives 7 cr at 14% stake and the value of share is 10 rs but in a chart, it has shown that the VC of series A has 700000 no of shares . How ?? he must have 70 lac shares not 7 lacs bcoz when we multiply 7 lacs with FV = 10 we get 70 lacs but the first VC gives 7 crores…. plzz reply
Saksham, please do look at the other comments. Dont get into the technicalities, the idea is to get the gist here 🙂
Hello Karthik
In the initial paragraph it is mentioned that 5 crores is pooled it, but shares alotted is worth 2.5 crores. Where does the 2.5 go? Is it considered as debt?
Not really, have discussed in the comments. Please do check 🙂
what is the role of not allotted shares of the company in financial books ?
is it considered as a liability or is it included in total company valuation figures ?
please explain me in details
It is included in the valuations.
Sir, I assume that After the arival of the 1st VC, he is given 14% shares from 50 lakh authorized shares and 64% shares are issued. but i did not understood 1 thing that is how initial investors (Promoter ,angel investor) investment valued 10x after 7crs of VC’s investment.
“The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs”
how the companies valuation is calculated? How 5+7 =12 Crores become 50 crores?
Please see the queries in the comments sections, have explained this multiple times.
How is face value decided?
How did the promoter decide 40% of shares need to be retained and 5% needs to be given to each angel?
Even though they invested 5cr in the idea, why do the angels get only 5% of the company share?
FV is decided at the time of creating the nominal shares, the usual practice is to keep it at 10 or 100. For the other bit, please see the comments posted erlier.
I have a question that how does the promoter earns money from this? The promoter owns 40% shares and the value of these shares are increasing as the company’s value is increasing, but for the promoter to get some profits, he has to sell some shares from the 40% he owns, right?
Please elaborate on this
Promoter raises money from the public right?
Yes, but the money earned from the company is stored in company’s bank account, right? hahah I’m confused please explain
Thats right, its in the company’s bank account.
The promoter can use company’s money? To what extent?
Depends on the purpose right.
How do company decide the price for initial share (face value) . As in this case it was Rs 10.
Generally speaking, companies set this to 10, 50, or 100.
If I wish to start a company but I am not skilled and don’t have enough market knowledge so I ask someone else to be the CEO. Now I contribute the idea and 70% money in the seed fund so will the CEO have more shares than me if so why?
It depends on the scheme of arrangement between the two of you.
Sir how valuation have increased for promoter and angel investors to 20crs and 2.5 crs each
And next remaining 14% of shares is valued at 64 crs.
How it is valued
And in the beginning stage there were no profits and breakeven
PLease do check the chapter and the comments section, Chandu. I’ve explained this.
Sir I’ve some confusion over valuation part
How the valuations are been made
I’m bba student, I’ve learnt about valuation of shares does that comes into Picture in your above example
One of the most common ways to arrive at valuations is to look at the discounted cashflow analysis or relative valuation method.
Sure sir I will check it
Thank you for your patience and one day I will personally meet and thank you☺
Happy reading, Chandu!
thanks man……
sharique samsudeen bro…..finally
i’am also here……………
Hi Karthik,
To arrive at a companies market cap we multiply the market price per share with the issued number of shares.
However, in the above example the value of the company is arrived at taking the total authorized no.of shares into consideration.
Please correct me if i’m wrong.
A market price or it could be any price attributed to the share. You can consider Authorized shares for unlisted/private companies.
The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.
With initial investment of 5cr by promoter and angel & additional of 7cr by VC how come valuing is 50cr?? can you please explain
Please see the comments, have explained this couple of times.
Hello Sir,
How does the valuation of Private Limited company (before going public) happen on what basis ? Is there any specific valuation process, How can we trust the valuation ?
Valuations based on the financials of the company. Very similar to how public limited companies are valued.
Q.1 In IPO’S Do i need to pay 100% or i can pay application money at 1st and later 1st call 2nd calls? Can you link with recent ipo of BECTOR FOOD, ANTONY?
Q.2 Can i apply to IPO zerodha Paying Application Amount ?
1) If the company is issuing fully paid shares then the entire amount would have to be paid upfront. However, this payment is only processed if you receive the allotment. While applying, the funds for your IPO application are just blocked in your own bank account and keep accruing interest for you.
2) You can apply for IPOs on Zerodha by blocking funds in your own account. This can be done by accepting a UPI mandate that is sent to you after you submit your application. Read more here: https://support.zerodha.com/category/console/ipo/articles/how-to-apply-for-ipos-and-how-to-stay-informed-of-new-ones
“The VC values the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.” Can you please explain in detail about what this means. Thank you
Please do check the comments Sujit. Have explained the same.
“The VC values the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.” What does this mean? Like how does he value the business at 50cr by valuing his 14% stake in the company. Can you please explain what this means.
Hey Karthik, amazing content. i did understand what it means. Thank you!
Good luck, Sujit.
So far the best series i have ever read on stock market……Tysm for this.
Happy leraning!
Thank you sir.. very useful information
Pls some one explain. Here they said Seed fund 5 crs is raised by promoter and angel investor. how much percentage each invested in this 5 cr.
Babukumar, please do check the comments section, this has been explained.
Why does the VC value the business at 7 crs when his share is just 7lakhs ( FV of each share being 10 rs) the value should be 70 lakhs not 7 crores ? isn’t it ?
Ashwin, please do check the comments section.
what does it mean by company is valued at so and so price after series funding? who decides on what basis?
Please do read the comments, Sharon. Have discussed this in the comments.
Hello SIr,
I have a basic doubt in the Example given above Starting a new a company.WIth a Promoter and two Angel Investors.
In the Example 5Crs is the “Seed Fund” (Initial capital). what are amounts each has put in that?
How shares are distributed among Promoter and two Angel Investors?
My doubt is because 5Crs, consists amount from all three of them. On what basis Promoter gets 40% and Angel Investors each 5%?
Please let me know.
Thank you.
Narendar, I’d request you to please check the query section, have discussed this across many user comments.
Hi,Karthik, Can we call Angel 1 and Angel 2 as VCs because they have also invested at the initial stage?
Yes, but the appropriate term would be ‘Angel Investing’.
Please edit the details/numbers.
It’s very confusing.
In the previous chapters, we had gone over the regulations and legal frameworks that are provided by SEBI. What is still not clear to me is the methodology by which VCs create their OWN evaluations of their OWN capital in a company? Shouldn’t that be regulated by SEBI or someone, as well?
1. VC #1 invests, blows up valuation by some opaque reasoning.
2. VC #2 does the same thing
3. VC #3 does the same thing
4. So on till the company is “valued” far in excess of what it’s actually worth
5. Company announces IPO
6. Retail investors (like me) excitedly jump on board and pay through the nose for the high shares
7. Company sinks, but the VCs make it out with their cash after selling the stock at an astronomical high
Isn’t this what basically happened to WeWork? Aren’t there any safeguards to prevent this from happening in India?
SEBI regulates the public market, the VC world is outside SEBI’s scope of work.
Ok,Thank you Karthik !!
How does the companies valuation double so much?
Why out of initial Authorized share (100%) are divided into 40% to promoter, 5% to each Angel Investor. 50% are unissued. Is this a specific pattern. Initial example total investment was 5Cr. Later on it is shown 2.5 Cr (2 Cr by promoter & 0.25 Cr by each Angel Investor).
Jems, the numbers is just to give you an idea of how things work. Please don’t get into specific. The idea is to understand how IPO flow works.
If company uses profit accruals for CAPEX and at the same time also raises fuds from VCs/PEs, whether existing share holder get any extra shares.
Nope, they won’t.
Thanks sir, for providing such a nice platform to educate us …….
Happy learning, Naymeem 🙂
Hi Karthik,
Q) At the time of initial valuation, we allot only 2.5lack shares to ANGLES so the valuation of their money decreased 10 TIMES. So, how is it possible angles invest on this condition ?
Q) In VC chart 2, Valuation after 2yrs column, we multiply value 10 times, so overall valuation is 32cr. But actual company valuation is (5cr + 7cr = 12cr). How can we consider it -> 32cr for 64% ?
Q) whenever company collects money, every time it improve overall business, not a part of the business. So why all expenditure are not CAPEX ? And what is the difference between CAPEX and OTHER ?
Q) Not only 2nd time, all time we multiple initial investors money 10 TIMES, WHY ?
I am really confuse because of these questions.
Please provide descriptive answer.
1) How did you arrive at that?
2) 12Cr for how much per cent of the company?
3) Please refer to the Fundamental analysis module
4) Not true
Gaurav, this chapter is to give you a general idea about the directions leading to an IPO. Dont pay too much attention to other things 🙂
Good material. Thanks.
Happy reading!
In Scene 1 – Angels, 4th Paragraph, 2nd line -> “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 its bank account.”
I didn’t understand the “instead sits in its bank account”. Who/What is “its”?
I mean the company’s bank account, Chinmaya.
Sir,
There need to be changes to be made in ‘Total No of shares’ column.,
In ‘Scene 4 – The Private Equity’ ‘Total No of Shares’ is mentioned as 4,450,000. If you calculate properly, the ‘Total No of Shares’ held by all the Shareholders should be 42 Lakh. 50 lakh shares is Authorized shares of the company. So, 84 % of 50 Lakh is 42 Lakh
* So, in short changes to be made in Varsity is instead of 4,450,000 it should be 42 Lakh. Am i correct here, Sir? Thank You
Ah, possible. Let me check this through.
Sure Sir. I am just trying to help here.
Got it, Nitin. Thanks for that 🙂
hello kartik, up there it’s stated that initially 5cr of capital was brought into the business and against it 50lakhs shares of face value rs10 were issued. but the thing is only 50% of the shares are allotted. so what is the person supposed to get against 2.5cr if not the remaining 50% shares of the company
I’d suggest you read through the comments, have discussed this a few times 🙂
yeah sure, thankyou for helping out
Good luck!
You have mentioned as Debt not being considered for reason:
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 company’s profits.
However I understand that Equity issuance is a more expensive form of financing as one has to give a share of cos profits as dividends, while debt can be repaid wit interest as finance cost which would be lower than share in profit. Also interest on Debt would be tax dedeuctable
Please clarify
Thats right. Problem is that most companies dont manage the debt properly, very soon it blows out of proportion. If the companies can manage the debt, than that’s a wiser choice.
[QUOTE]Ah, possible. Let me check this through.[/QUOTE]
Karthik Rangappa Sir, have you checked it as you said. Kindly, tell me which figure is correct 4,450,000 mentioned in Varsity or 42 Lakh as said by me.
If ‘Total No of Shares’ held by all the Shareholders In ‘Scene 4 – The Private Equity’ is 4,450,000, kindly tell me how this figure arrived?
The reason is I am asking this is because figure amount is not being corrected yet in Varsity. And i am confused and stuck here and cannot move further in reading into Varsity without knowing the correct facts. If you just tell me orally which amount is correct it is enough for me and I can proceed further into reading Varsity. Thank You.
Nitin, there could be few discrepancies here. Like I’ve mentioned in my previous comments, the idea here is to just get the flow of events and understand why companies go IPO. Please don’t read too much into the numbers.
Thank You Karthik Rangappa Sir .
Good luck, Nitin.
How did you calculate the valuation of the company in series A and in PE funding
Arbitrary 🙂
How did you calculate the valuation of the company in series A and in PE funding.How it increased from 5 cr to 50 and then to 200 and 400
As I mentioned, these are arbitrary assumptions just to continue the flow.
Suggestion: please add audio for these articles.
Noted.
Hi, regarding this statement in the article:
The VC values the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. So the VC just decides that the value is 50 crores according to his whim? If a VC puts some value why should anybody else agree? because it seems the VC just created money out of thin air .Sorry for such a novice question.
Ah, have explained this couple of times in the comments, Sharath. Request you to please do check the same 🙂
In the Venture Capitalist part, How has the VC valued the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs?
This has always confused me, can someone elaborate on what calculations were done to reach a VC’s valuation of 50Cr. ?
I didn’t understand when you said that after the VCs investment that company’s valuation increases 10times. It went from 5Cr to 50cr but how did that happen? How does VCs investment increases the valuation of the company by 10 times?!?!
Neel, I’ve explained this in the comments quite a few times. Please do check the comments section for this.
Many thanks for detail explanation. This is very helpful.
However, though we are not supposed to read too much into the numbers, pls help clarify as finally its all about numbers.
Q1. In example of series A funding –
When initital Share Capital is 5Cr and when company agrees to allot 14% to the VC from the authorized capital.
With the VC’s money coming into the business, the VC values the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.
How does valuation goes from 5Cr to 50Cr? Is it just a number?
Q2. At the time of series B funding,
series B – divests 5% equity for a consideration of 10Crs from another VC. Note, with 10Crs coming in for 5%, the company’s valuation now stands at 200 Crs.
How is this 200cr?
Q3. For allottment of shares against series A, B and C funding; allottment is done through authorised shares/issued shares or equity Shares?
1) If 14% is valued at 7Cr, how much is 100% valued?
2) Same logic as above
3) Happens both ways, but most of them issue new shares.
Dark mode for varsity would be highly appreciated, any plans regarding that?
Yeah, its on the cards.
Sir, Under Private Equity (PE) Section – 5th Stage of Share Holding Pattern topic, the total no of shares allotted is the wrong value. It should be 42,00,000 shares not 44,50,000.
It is kind of confusing. Please correct that mistake.
Let me check. Thanks.
Who decides the total number of authorized shares or who decides the value of a single share? It is definitely not on a random basis so what is the method to decide this and ensure the price per share is correct?
No, depends on the management and their auditors.
Hi karthik,
Thanks for this knowledgeable sharing.
I have a basic doubt. At any point of time, the shareholding of a company should be 100% right. Or shareholding is calculated only for the issued portion. So in accounting perspective where does the money in authorized capital goes. Does it sits on reserves?
Also when a new investor gets in at a higher price than the promoters, what is the accounting perspective. Thanks.
Tina, either authorized or maybe the promoters will issue new shares. BUt whatever is outstanding will be factored in.
Great Article, very well explained. I am a beginner, this is the kind of blog I was looking for to learn about the share market.
Happy learning, Supriya!
How is the company valued at some hundred CRs by the investor at the time of investing?
Hmm, please do check the comments. Have been answered a couple of times.
Understood
Hi , I’m new and I don’t think I understand this correctly, so when the first VC puts in 7 cr and you’re saying the vc values the company at 50 cr crore by valuing his 14% stake in the company at 7 cr. You’re trying to say that after he invests 7 cr the company goes ahead and makes a profit of 50cr? If so why does he not get a part of the profit like every other initial investors? Why does it says his valuation after 2 years is 7cr still?
We have discussed this at length in the comments section, request you to please check this.
Firstly, Thank you for teaching us. It’s so understandable and so clear. Now, I have a correction and a query
Correction: In the last table of the chapter, No of shares bought is 42,00,000 (42 lakhs). Please correct it otherwise in the next chapter people will get confuse with the remaining shares left to put in IPO (i.e. 8 lakhs).
Query: Can we change the face value of the share at a later stage. or is it fixed at fixing authorized share capital only ?
Thanks Raghu. Will look into the correction.
Yes, you can change the face value. In fact, it gets changed whenever the company announces a stock split.
Consider an alternate scenario where only one of the promoter’s friends invests 3 crores as an angel making it the initial seed investment. The promoter and angel own 40% and 10% share respectively. Then the second friend invests the remaining 2 crores as a VC for a 5% share. Would the company be valued at 40 crores?
Yeah, end of it what matters is the price at which investments were done.
Why 50% of the shares have to be retained with the company?
Please do read the comments, have explained the same 🙂
understood the concept
When the company started with 5Cr, technically all 3 combined are full (100%) owners, then why they splitted only 50% shares?
The other shares are ear marked for other purposes. Have explained in the chapter.
What does it mean for the company to retain 50% of the shares after seed funds? Does the company own half of itself? And if the entrepreneur owns less than 50% of their, won’t they lose control?
Please do check the follow on comments.
What is the meaning of authorised capital ? Why authorised shares decides on bases of initial capital even after company valuation increases?
Please do check the comments, have explained the same.
I think Zerodha will open IPO when it compitators started providing similar services with similar price range. Couple of zerodha services are not available in other platforms. So zerodha is playing a monopoly role like APIs, algo trading, integrations etc..
As of now zerodha can come up with premium valuation.
I don’t think there is any idea of going for an IPO now Rakesh 🙂
Sir
Are your all chapter is in hinde language?.pl.give me link ?
Can someone please explain this in detail?
With the VC’s money coming into the business, an exciting development has taken place. The VC values 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.
I guess there is a lot of discussion around this in the query section already 🙂
Thanks.
“The VC values the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.”
Regarding this, although the VC agreed for 14% stake and raised the valuation to 50 crores, how does this translate to the actual wealth for the company? This still looks like virtual and only on paper. Please clarify.
Yes, Vinay. Please read the comments.
I find that if I compare the app version and the desktop version the content is slightly different, why is that so?
Small difference, but the content is largely the same.
Can a shareholder of a listed company trade in secondary market, i mean can they manipulate there stocks in the market just to benefit themselves of their share holdings value in the company?
Yes, the person can.
The “Total Shares” in the Private Equity section is incorrect. It should be 420,000 shares at 84%
Hi Karthik,
Awesome content! I’m glad to have found this for gaining knowledge. I would like to bring to your attention that a little glitch occured in the last table where the total number of shares should be 42L (not 44.5L)
Thanks
Let me check this, Parvathy. Happy learning 🙂
Sir, i have a doubt… What “valuation” actually means? And at what basis it is increasing ?
Poornima, valuation means the worth of a business. It increases or decreases along with the way business moves.
Thanks alot sir 🙂
Good luck, Poornima!
Hello Karthik,
What is your opinion on SPACS?
Corresponding Material
Material 1 : https://www.youtube.com/watch?v=Y8E2f0V2NVI
Material 2 : https://www.thehindubusinessline.com/business-laws/regulatory-challenges-for-spacs-in-india/article34124252.ece
Best Regards
I dont know much, from whatever I have gathered, it appears to be surrounded by a lot of greed and speculative aspect. I could be wrong.
Can you explain the how the balance sheet will look like in scene 1 …If the authorised share capital is 5 cr and issued share is 2.5 cr then where will the rest 2.5 will show? Is it necessary that the company should have equivalent amout of asset available to authorised capital?
Please do check the module on Fundamental Analysis 🙂
At the Initial stage, How promoter decides how many shares will be given to Angel Investor. For ex. In the above example Promoter keeps 40 % and share the other 10 % among the Angel Investor.
Let’s say Angel Investor Invested 1.5 cr then will he accept just 5% stake in the company?
Please see the comments for this.
when you say “The VC values the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.” Can you please explain how does a VC value the business at INR 50Cr now ? what is the math or thought behind it ?
I’ve explained this in the comments section couple of times, request you to please do check the same.
sir here i have not understood that if the angle inverstors and promoters have gathered the seed fund of 5cr then the shares of them in company should be total of 100% but promter takes 40% and both angels get 10% don’t seems like next day if they sold there shares they will not get the amt invested in the company ???????????
We have discussed this several times in the comments, Ashwin. Request you to please check the same.
when a VC entered for 14% stake, his shareholding face value is only 70 lakhs, what happens to the remaining of the 7 crores he invested
Aneez, we have discussed this in the comments itself, please do check the same.
Hey. Thanks for these amazing articles.
In the Angel Investment stage, are the angel investors assigned shares equivalent to their investment amount i.e., if they invest 5 lakh, they get shares worth 5 lakh each? If not, how is the number of shares assigned to them decided?
It is proportionate to their investment, Sindhu.
Hey, thank you for such an insightful and well-explained article!
I had one question regarding valuation- why is it that initially, the valuation (5cr) is based on the entire seed money, but after the A and B rounds of VC investments, the money invested by the VC became the basis for calculating the valuation. Why is that?
Thank you!
Aishwarya, I think we have discussed this in comments, can you please run through it once? Thanks.
Sir why did you take the face value of share Re 10. I mean how did you calculate it or assume it….why not 1000 ….m Very confused…
The face value of a company is assigned at the time of company creation. Think of the face value as the notional value assigned to the shares.
Who controls the “not allotted shares” from beginning till IPO comes?
Merchant Bankers in consultation with the company and its auditors.
Hi Karthik, I think this line in Paragraph-4th, Scene-1 is incomplete :
“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 its bank account. ”
I think its end should be something like : “but instead sits in its bank account of the company.”
P.S.- Your writing in simply great! Thanks.
Ah, yes Sam. This needs correction. Will do.
Thanks
Thank you for sharing the knowledge and making it easy to understand for a beginner.
Happy learning!
Karthik Sir, thank you very much for such a wonderful material. Total initial investment by promoter and two angels (Seed capital) is Rs.5 cr whereas in Table 4.3, initial valuation is shown as half value of this amount i.e. Rs.2.5 cr. Why initial valuation is less than initial actual investment by promoter and two angels ?
Hey Rakesh, I guess we have discussed this in the chapter and comments. Request you to check once. Thanks.
much helpful for beginner
Hi,
1. In the above chapter ” (Promoter + Angel 1 + Angel 2 + VC series A + VC series B + VC series C) shareholding = 84% “.
My question is, if company retains 16% of shares then is it not a dead investment for the company ?
2. Are the “Promoter and Promoter group shares” PREFERENCE shares? If yes, are these the ONLY
preference shares that the company has issued ?
1) Not really. As the value of the company grows, so does the value of shares. So all shareholders will get rewarded accordingly.
2) No, promoters shares are not preference shares.
Hi,
With respect to the above example, could someone please explain what is “Subscribed and Paid-up capital”
Authorized shares are the shares issued by the company at the time of its formation. Paid-up is the number of shares that are fully paid for by the promoters and investors. Subscribed shares at authorized shares, which are paid up. When a company goes IPO, if it is not fully subscribed, then the subscribed shares will be lesser than the paid-up shares.
Okay. Thanks, I got it. I have one more doubt — Are ‘preference shares’ part of the ‘issued shares’?
Thats right.
Okay. Thanks Karthik. Please clarify me on this one :
1. (Promoter + Angel 1 + Angel 2 + VC series A + VC series B + VC series C)— is this the group of members whom we call as “Promoter and Promoter group”?.
My thinking is this – All of them who have invested in a company before the company raises funds through IPO’s are called as “Promoter and Promoter group”. Is my understanding right?
Also, I am trying to keep a record of Shareholding pattern of some companies so that I can track the presence of big guys/ and they distributing their existing holdings. However, I am finding difficulty in understanding who are the big guys. In some companies the row name would be “Foreign Portfolio Investors” but in other companies that row would not be present but instead “Foreign Institutional Investors” would be there and many other rows which names are difficult to understand. Could you please suggest me the right way(or a source to read like a particular book) to get expertise in understanding Shareholding patterns.
1) No, only the promoter is classified as promoter and promoter group. The rest are called investors or early investors
If you look in the shareholding pattern, you can see the list of top 10 or 12 investors. YOu just need to keep tab of that.
There’s a mistake in the beginning. You are saying company’s cash position is INR 5crs and share capital position is INR 2.5crs, where the remaining INR 2.5crs is authorised share capital and not issued capital. Since it is authorised share capital, it will not be a part of balance sheet and that funding is not yet generated. Hence, please update the cash position to INR 2.5crs.
Yup, I think someone else pointed this as well.
In the given example, the initial share capital of the company was 5 crores (assume promoter invested 2.5 crores, angel1 1.25 crores, angel2 1.25 crores), when the initial issued shares are less than authorized shares, all three of them took a hit. Promoter was valued at 2 crores against investment of 2.5 crores, Angel 1 and Angel 2 were valued at 25 lakhs against investment of 1.25 crores. Why they agreed to such a situation, shouldn’t they own all of the shares authorized, amongst themselves and at a later stage when any VC comes, few of them would sell their shares, in order to allocate them to the VC.
Pratik, please don’t get into the nitty-gritty of the example. It is a crude example to explain how the IPO flow works 🙂
Hi, what’s the difference between Venture capitalist & Private equity? Also every time the company valuation is decided by whom, the new investor in each stage…
Both are private investors. VC comes in at an early stage and has a large risk appetite compared to PE.
SIR CAN I USE YOUR MATERIAL IN VIDEOS FOR BASICS OF STOCK MARKET PLEASE I WILL PUT THE LINK TO ZERODHA VARSITY IN DESCRIPTION PLEASE
Many people have done that, please give credits the Varsity 🙂
Hi, Karthik Rangappa, I have a doubt: How can an investor fix a company’s valuation at a certain amount on the basis of his/her percentage of investment (eg: The VC values the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.)? And from where does the amount of increased value of 50 Crs come to the company?
PS: Your prompt replies to almost all of the queries are highly appreciated.
Thank you.
Its based on the value that the investor assigns. It is arbitrary. Please do check the comments 🙂
“the company assumes that each share is worth Rs.10” is this assumption of Rs.10 standard for all companies or is it something the promoter has assumed?
The face value is a nominal value, set by the company at the time of company formation. The face value changes based on corporate actions during the life of the company.
Initially when promoter started with 5 crores..no . Of shares is 50 lakh shares. But as the company grows and valuation increases..do the total no. Of shares remain same.i.e 50 lakh only..
Yes, unless companies specifically increase the equity base.
Sir what is the meaning of “Once the seed capital hits the company’s bank account, the money will be referred to as the company’s initial share capital.” ? I could not get it
It is just the way funds are referred to as, Raseswar.
Hi varsity team thanks for the good content. Im interested to study more about private equity and hedge funds accounting could you please help me with any resources.Thanks
We don’t have content on that here, as it is more operational in nature.
Hi Karthik,
84% of 50 Lac shares tends out to be 42 Lacs shared issued, since its written 44,50,000, would request you to make the required changes. It would help us to being more clarity
Checking this, thanks for pointing out Tanya.
Yes please, do correct for the clarity of users.
Not able to understand Intial money contributed by Promoter and Angle Investor is Rs 2.5 Crores. Not Rs 5.00 Crores as stated in chapter. Company Authorised Capital Is Rs 5.00 Crore. Then company is valued on Issued capital or authorised Capital.Plaese clarify.
Arun, we have had several discussions on this already. Request you to please check the comments section for this.
Maja aa gaya aisa content chaiye
What’s the difference between revenue and turnover?
Sir, who decides that how much share a company have and price of that share & how?
Usually, the company’s auditors do.
May I know how this valuation is calculated. ->
The VC values the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs.
Manoj, please check the comments, we have discussed this.
In the scene 1 – the Angel, why angel investors were given the lesser shares than the promotor. What if all three had put the quivalent money in the initial seed value ?
Manis, we have discussed this in the comments section. Please do have a look.
Hi Karthik ,
Thanks for your efforts in explaining the concepts in a simple easy to understand way. I have one feedback.
Everything explained is clear expect the initial allocation which caused a little confusion for me. ie
1. How much did the angel investors have given out of this initial 5Cr ?
2. How angel investors and promoters get in agreement with 40% share and 5 % share each ?
3. Here 50% is not issued share. On what basis that agreement is made ?
Arjun, thanks and I’m glad you liked the content. I’d suggest you read through the comments, we have discussed the points already.
Again the company hold 50% of the authorized shares. Actually the fund for his is provided by Angel investors and promoter. So i am confused why those are not given to them.
Yup, please see the comments for this 🙂
Again the company hold 50% of the authorized shares. Actually the fund for his is provided by Angel investors and promoter. So i am confused why those are not given to them.
Sir, can you please explain this point and the subsequent table. I am getting a bit confused. “The VC values 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.”
Thank you sir
Aneesh, I’ve explained this in the chapter and the comments several times, request you to please check the same.
Got it sir. Thank for your help. The content is really helpful and now I feel more educated in stock market than before.
Happy learning, Aneesh!
Can you post a search button at start of the comment section – to filter and see if my question is already asked.
In the initial 5 crore invested – it says valuation is 5 crore – but is 5 crore actually a debt as the owner has put some of his money and taken money from 2 other money.
How is this an asset – as ideally it should be a debt – is it because its lying in the company bank account ?
Regards
Making a note, will check with the tech team if this is possible.
I am quite confused from second para including the second table on the venture capitalists section. “With the VC’s money coming into the business, an exciting development has taken place. The VC values 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.” Would you mind explaining it in simpler words for me?
Sriya, this is something we have discussed in the comments section, request you to please check the same. Thanks.
Scene 2 – Venture Capitalist
If VC is adding Rs 7 cr to Rs 5 cr elevating total fund to Rs 12 cr then how can he “value the entire business at INR 50 Crs”?
Can you please explain what is that I am missing in it?
How much fund angel investors are raising in this example?
PLease see the previous comments.
Great initiative by Zerodha for financial literacy and awareness. I am a commerce graduate and PGDBM so familiar with business/finance terms. I am an equity investor as well. However this initiative has come as a much needed refresher. It feels like I am a student, learning new concepts.
Thank you!
Thanks for the kind words, Ashish. Happy learning 🙂
Nice information provided. I agree with all your points.
Happy learning!
Hello Sir, I would like you to add one more chapter on grey market premium with an excellent example to facilitate ipo price study generally considered by grey market premium, one of the most important factors….
Noted, will try and include this.
Sir Promoter, and 2 Angle investor together raised 50 L shares. so why only 50% was distributed proportionately between them and blc 50% with company, why not 100% amongst them? Is that the rule? Thanks
Not a rule, Rahul. This is just a hypothetical situation.
Sir, how does one calculate/arrive at the valuation figure?
Valuation is dependent on several factors, Ravi. You can do a simple DCF to find out the value of a company. That topic is outside the scope of the discussion in this chapter, but do keep a track on Module 13 where we will discuss this topic.
Hi Karthik.
Can you explain more on this ‘valuation’ statement with mathematical example?
‘Note, with 10Crs coming in for 5%, the company’s valuation now stands at 200 Crs. ‘
Can’t seem to understand the statement without some mathematical proof.
Harshit, I’d suggest you keep track of this module here – https://zerodha.com/varsity/module/financial-modelling/ , will be explaining these concepts.
Sir, In the scene 1 the company has raised capital of 5 crores and there are 50,000,00 Authorized shares, but the company only issued 50%[25Lakhs] of the Authorized shares and the company has retained the balance 50%[25Lakhs] of the authorized shares right? But, this retained shares of 25 lakhs belongs to whom? is it belong to the promoter or the angel investors? Because the shares have to be correctly allocated, according to the money which the investor has invested right?.
For example, Assuming if a company has raised 10 Lakhs share capital in which the promoter invested 5 lakhs and the two angel investors invested 2.5 lakhs each and there are 100,000 shares each worth 10 rupees per share. In this case, the promoter is supposed to get 50,000 Authorized shares and the two angel investors supposed to get 25,000 Authorized shares each right? And let’s say, the company wants to retains 25% of its shares, but how is it possible as the promoter will be getting 50,000 authorized shares and the two angels needs to allocated 25,000 authorized shares each and there are no extra shares available to retain? In this case, the promoter needs to give up his 25,000 worth of authorized shares is it?
THANK YOU
Bhuvan, its authorized but not issued and subscribed. By the way, please check the previous comments, I’d suggest you get the overall flow of an IPO and not really dig into the specific. For details, you can check the Fundamental Analysis section.
Please explain in detail how to do company’s valuation?
Please keep track of this module – https://zerodha.com/varsity/module/financial-modelling/, we will discuss valuations soon.
Will VC(Venture Capitalists ) Have right to take decisions about the company?
Some do interfere with the company’s decisions, some dont.
Hello sir,
I have query regarding holding pattern of shares.
Something I found FII decreases their shares but mutual funds increases their shares for same particular company (and vice versa). My query is which one is more convincing / reliable. Thanks.
I look at both as institutional funds, so you can take the net value 🙂
Hi karthik sir,
I was studying about the issue of shares & debentures today (as I am a CA student). And I also read this module today,
after reading about the share holding pattern in first scenario of the imaginay story,( where the promoter and the two angel investors started ths business.)
I am very confused and unable to understand why they own only 50% of company though the whole amount of capital is contributed by only these people. Why not the share holding pattern is in the Ratio of the capital contribution?
For ex. IF the promoter contribute 3cr
And the angels contribute 1-1cr each
Then total capital =5cr.
Now cant we say that the ownership in the business should be 60% and 20-20% respectively?
Yes, that can be the case as well. But the purpose of this imaginary story is to only give you a perspective into the circumstances leading to an IPO, its a broad generalization and like I’ve mentioned in the comments, please don’t dig into specifics 🙂
Please clarify one basic doubt please….. A company goes public and people buy the shares thus giving capital assistance to the company. But once the shares are traded in secondary market, how does the company gain? If Mr A sells a stock to Mr B is the money not going solely to Mr A only?
No, the company does not gain with trading. It gains only at the time of IPO when the company gets the funds. But if the share price increases, then the overall shareholder wealth increases, which is good for the promoters and shareholders of the company.
Thank you.
So, like the cost of stock differs from the face value, the net worth of a company may be at times lesser than the apparent market value?
Yes, thats possible as well. In fact it is true for most companies 🙂
In the above learning – “Let us assume he meets one such professional investor who agrees to give him 7 Crs for a 14% stake in his company.”
My question might be dumb , but need to understand this.
Why does he give 7 Cr for 14% stake. when initial investment of 5cr is actually 100% of total shares?
That’s based on the valuation of the company. Valuations is the future growth potential of the company. So in a sense, you pay for growth upfront.
I know it is hypothetical, but why are the
angel investors alloted such less shares initially. If the authorized shares are 50 lakhs and they have only been alloted 5% which is 2.5 lakh shares, doesn’t it immediately bring their investment value down?(2.5 lakhs x 10= 25 lakhs value, for a 2.5 crore investment) I know they stand gain the most if it does well in the long run, but it seems like they take most risk. Cannot wrap my head around this. Can you please make me understand this better?
Surekha, this is a made-up situation just to illustrate the circumstances leading for a company to go IPO. Dont read too much into it 🙂
How the valuation of a company is decided?
Please keep track of the last module (Financial modelling) for more details on this.
In scene 2, the second table has the initial investment of only 2.5Crs by the promoter and the angels where as we were told that the initial investment was made of 5Crs. Please correct that error if it is one. Thankyou!
Sure.
Hey,
I just wanted to know, whether the retention of authorized shares between the promoter and the angel investors is based on their investment ratio or just by mutual consent.
As cited in the explanation above, the promoter retains 40%, angels retain 5% of each and the rest 50% is held by the company, is this distribution based on the investment of each person?
It is largely a function of valuations and mutual agreements.
Hello team Zerodha can you explain how you calculate the amount of money to be invested in any business for example why how VCs invested 7crs for 14% instead of 10%, please can you explain me this ?
Nitesh, that depends on multiple factors. Usually, the investment bankers will help you with it.
If I am an private equity investor, what all things I need to look for before investing in any particular business opportunity. Is there any article published on this topic.
No article on Varsity as such, I guess you will have to look at articles related to PE investing 🙂
Sir,Is Valuation of a company similar to market capitalization ? Do they depicts the same meaning ?
Market capitalization is one of the valuation metric, not the only one.
In the example given in this article, it says
“So let us imagine that the promoter, along with the angels, raises INR 5 Crore in the capital.”
“The only asset that the company has at this stage is the cash of INR 5 Crs, the company’s value is also INR 5 Crs.”
Since the Authorized Shares are 50,00,000 @ Rs10/- per share, all shares(100%) should be allotted to the promoter and Angels. (Not 50% as said in the example)
Bino Mathew
Note: If 5 Crs is changed to 2.5 Crs. it becomes correct.
Sure Bino, let me look into that. By the way, the flow of the article is just to let the user know the chain of events leading to an IPO and not get into details of the numbers as such 🙂
Thanks Karthik sir for such detailed and amazing info, valued at Rs .0!!! The way you structured the story around business jargon is beautiful. True Art!! Love the way Zerodha has made such an amazing environment for finance, at so low costs.
I’m glad you liked the content, happy learning 🙂
thankyou man
Hi Karthik, I think the total number of shares in the table under “Scene 4 – The Private Equity” is incorrectly populated. It should be 42 lakh shares instead of 44.5 lakh shares.
Hi all, By taking above business as an example. In the starting stage, the company spent 5 crores to fulfill all the requirements But they use only 50% of its shares. Can you please explain a little bit about this?
I’ve done that in the chapter itself, also please read up the comments, we have discussed this in detail.
“Note, with 10Crs coming in for 5%, the company’s valuation now stands at 200 Crs.” How this valuations is calculated ?
Have explained that in the chapter and comments, Vinod. Can you please take a look?
Sure
How to start investment
Did you open your trading and demat account? Before that, please read through these lessons and familiarize yourself with the market eco system.
sir, what is notional wealth, and if the valuation is increased by series B, through which share valuation occurs.. how come previous angel investor will be benefitted out of this?
Notional wealth is depended on the valuations, Megha. Thats besides the point, idea is to just focus on the flow of events leading to the IPO.
10% of Subscribed Capital (Face Value) of the Investee Company (including the proposed Equity issue through IPO)
what does the above mean?
Vamsi, what is the context?
Before raising series D, will the investors in previous rounds who have shares in the firm will get money from the profits made on regular basis?
Depends on the agreement between the company and its investors. But in most cases, it is not.
Lot of insights on Business , Thanks and grateful to varsity team for this “wonderful content” as well for published as Free….
Happy Learning…
Happy learning 🙂
“All the previous investors (in this case, the two angles) tend to make notional profits on their initial investment.”
I couldn’t understand how the notional profits work when new funding comes in. Could you please explain it with a small example if possible. Maybe I’m missing something simple
Notional profits is basically paper profit. Assume you buy an apartment at 1Cr, after 2 yrs, the same apartment is at 1.5Cr, but you still haven’t sold. This means you are sitting on notional profit of 50L.
Can we consider the Angel Investors as Promoters?
Not really, they are early investors in the company.
I am having problem in calculations given in the table. I don’t know how to calculate valuation. Please help.. Where can i learn that??
Valuations is a fairly vast topic, Akshita. I’d suggest you look at this module where I’ve explained Financial Modelling and Valuations in detail – https://zerodha.com/varsity/module/financial-modelling/
hello kartik sir ,
i m totally impressed and gratitude towards u and your company to make us literate..
thank u
gratitude
Happy learning, Tarika!
Hello Karthik,
> The face value could be any number.
This is not true and actually regulated by SEBI to protect investors. Refer “SEBI (DIP) Guidelines updated upto August 20, 2009”: https://www.sebi.gov.in/legal/guidelines/aug-2009/sebi-dip-guidelines-updated-upto-august-20-2009_4161.html
Refer under section 3.7 “Freedom to determine the denomination of shares for public / rights issues and to change the standard denomination” pg.31
a. The face value is restricted to a floor of Rs. 1 per share and can be whole number in Rs, below Rs. 10/- provided the issue price is above Rs. 500/-
b. It is fixed at Rs. 10/- per share if the issue price is below Rs. 500 per share.
etc.
Can add some provisions to the content like “face value can be a number between Rs 1 to sometimes even above Rs 10 per share, as restricted by SEBI DIB Guidelines to protect investors”.
Sure, thanks for pointing this. Will make the change.
Can anyone explain how new investments will benefit the old investors like the share price is not gonna increase right?
Sorry, can you add more context to this query?
To summarize a company cannot enter IPO until they come to the stage and need money for CAPEX.
Not really, there could be many reasons for an IPO, CAPEX expansion is just one of them.
Hi Karthik sir, the Updated Content is Very much interesting.
I am Bit confused regarding Face value in the given example. Can you simplify in the context sir.
Can you check this, Raghu – https://www.youtube.com/watch?v=EAucHlFstdU
I am a little confused about the Face value. How is the face value is set, Are the Face value and stock price the same?
Check this – https://www.youtube.com/watch?v=EAucHlFstdU
Can you be more illustrative ? Till scene1, I could make clear understanding due to examples and values. Further it’s hard to understand
Which part are you finding it difficult? Let me know if you have any specific questions around this Vishal, will be happy to help.
How valuation is done???
Check this – https://zerodha.com/varsity/module/financial-modelling/
Hi,
Can you please explain how the number of shares are decided for allocation in case of Series A to D funding ?
Does it reduce promoters and angle investors shares?
Mukul, there is no set formula for this. The allotment will happen on the basis of various fund raise and valuation metrics.
Thanks Karthik
Hi there,
Amazing content, thanks for sharing these to make us financially literate! 🙂
One question, maybe very stupid but still wanted to get some clarity on this.
In the example given in the article, initial seed funding round is of ₹ 5 Cr and next VC round is of ₹ 7 Cr. Face value per share is assumed to be ₹ 10.
Promoter and angel investors combined had a total of 50 lakh shares as per the given calculation. Does this mean the VC in Series A round will be allotted a total of 70 lakh shares? Does this mean that the promoter owns a smaller proportion of the company than the VC; Is that possible? How so, does this not mean that essentially the promoter doesn’t own the company since he has less shares than the VC?
Thanks once again!
All these things are possible and it really depends on how the valuation of the company is perceived 🙂
Ohk, thanks for the reply!
Sure, happy learning 🙂
Why do companies go public
Thats explained in this chapter itself 🙂
There is a difference between the text on the website and the PDF document for the whole module. The website does not show illustrative tables. Which one is updated and to be placed reliance on?
I’d suggest you look at the website version, there is a possibility of missing to update the PDF, although we try our best to keep it updated.
Could you please suggest any other materials of yours or any other for deeper understanding.
All our content is here and on youtube. Suggest you check our Youtube channel as well – https://www.youtube.com/@varsitybyzerodha
Good lession regarding IPO.
Sure, happy learning.
Some promoters or partners with smaller stakes in the firm may lose their whole proportion due to dilution when the company seeks to raise funds through rounds.is it possible.
Yes, but they can participate in future rounds and maintain their stakes as well.
If a company never raise venture capital or Private Equity funding, but remain bootstrapped and and able to generate steady profits for a long time(say a decade), can they still go for an IPO?
Yes, of course they can.
sir if we invest in any company ipo on the launch date in how many days can we sell that
can we sell that on listing day
Yes, you can sell the same day Ravindra.
I dont think my doubt is that important but how is a company going to be seen in the stock market?
Your doubt is as important as anyone else’s doubt. The company will be seen on the basis of its valuation, services, and management repute.
Possible changes:
1) The list is quite exhaustive. ~ When we say a list is exhaustive, it means that it is thorough and complete. Replacing “exhaustive” with “long” would work better?
2) “… because of the interest rate burden, also called the finance charges, bites into the company’s profits.” ~ remove “of”
3) “They are highly qualified and have an excellent professional backgrounds.” ~ Change to “background”
4) “…have a presence across all the country’s major cities.” ~ Change to “…have a presence across all of the country’s major cities.”
5) “…across all the major international cities…” ~ Change to “….across all of the major international cities…”
6) “Angel’s invests a relatively small amount of capital” ~ Change to “Angels invest a…”
7) “…rewarding shareholders, etc” ~ Change to “etc.”
Thanks for pointing out 🙂
Im an engineer and with an interest in investing I started reading this modules.I promise I had zero knowledge in stock market and how business works, but these modules are helping me a lot to understand the basics.With the confusion of where to start learning with lots of content on youtube I luckily got this platform and I felt Im at the right spot that too in 2023. Thank you for your productive content Karthik Sir!!!!!
Thanks fir letting me know, I’m glad you liked the content on Varsity. Happy learning 🙂
The Valuation total of 336 Cr on page 27 is not correct it should be 400 cr
Which valuation are you referring to?
Karthik please mention share dilution..
Can you share more context, Salim?
Does VC, angel investors and equity investors (DII, FII) share holdings are also counted for calculating outstanding shares?
Yes, they are.
Does shares held by the founders count in free float market capitalization?
Yes, they do.
1.What if in each stages,that is in series A,B fundings,the former VCs or angels aren’t ready to divide/dilute their shares to allot shares to new VCs for their investment or funding
2.’Note that the company’s valuation again increases with 10Crs coming in from series B.’,why in this context it is said 10crs from new VCs,i.e.,series B increases the company valuation,so the bank lending money doesn’t add rise to company valuation,because it is a liability?,please clarify
1) These investments happen only if there is a need for raising funds. The promoters have to dilute.
2) Yes, in lending there is no dilution of equity.
why issuing shares are important in starting where angel investors invest? I mean to whom they issue shares?
These are to investors who are interested in investing in the business 🙂
With every new investment, the previous investors tend to make notional profits. Does the face value of the share change due to new investment? It would be helpful if you can explain this with a math background. Thanks Karthik.
No, the face value does not change at all. Also, I’m not sure if I understand your query fully. Can you please elaborate? Thanks.
In the example mentioned in Venture Capitalist that company required funds of Rs 7 crore. Earlier business valued at 5 crore. So after Seed A funding, what will be the the total valuation – 7 Crore, 12 crore or more?
Valuation depends on the % of equity being sold vs the money. For example, if a 10% of the company;s equity is sold for 100Crs, then 100% of the company is valued at 1000Crs.
What happens to the shares of the company that were never bought ? Let’s say a company issues 1000 shares but only 900 of them were bought by the public. What happens to those 100 shares ? Who takes them ?
The unsubscribed shares will remain with the company, and in such a circumstance, the IPO is not fully subscribed.
i want to know what happens if a VC invests in a company but the company starts having losses . so now the VC will have to bear the loss ??
Depends on the time period and nature of losses. If the losses lead to company’s closure, then yes, that would be a loss.
Who is the promoter? Can someone tell me? I’m confused.
Owner of the compnay 🙂
Thankyou sir!!
Happy learning, Abhishek 🙂
Comments area great place to learn
One small change- if we stop at a point today, it should show us where we stopped. Just as they have in audible books. It shows us where we finished yesterday. Otherwise tracking is tedious and cumbersome
Dr.Ram, thanks, this is a useful feedback, and I’ll share this with the team.
good info
Sure. Happy learning 🙂
Why is part 2 theory not opening????
You have to navigate to the next chapter 🙂
“The face value could be any number between Rs.1 to sometimes even above Rs.10 per share as restricted by SEBI DIB guidelines to protect investors”
Please tell me what does this mean. Does SEBI regulate the face value of a share or is it something else?
No, the face value is determined by the company at the time of forming the company.
Hi
As mentioned in the first scenario, the promoter and angels raised 5 crores.Promoter and his friends own a combined 50% or 2.5 crores, where did they raise the balance amount of 2.5 crores ?
How can the remaining shares be kept aside ?
Can be reserved for ESOPs right?
Yes but wouldn’t someone need to buy the shares in order to give ESOPs ?
Otherwise how can a firm have a share capital of 5 crores and only 2.5 crores have been paid for ?
ESOPs are allotted right? That comes from the share capital.
I just want to know how ipos like mainboard and sme ipos for hni like smallhni and big hni categories will be allocated like is it both small and big hni have separate reservation ? Or both consider same for lottery
Ye kon hai jo mujhe apne share holding asset investment equity rights Dene mai dikkat kar rha hai jab real holder hai aur kya sabot chahiye tumko check my rights holding portfolio provide my right koi apne customer ke sath aise nahi krta jese tum kr rhe ho kya jankari chahiye tumko bolo mera sab kuchh authenticate hai koi fake link nahi koi side se download nahi kiya Play Store se download hai 4 3 mahine se ticket daal raha hu complaint dal raha hu phir bhi fake ko support aur real ko ghuma rhe ho aur jo new new video bana rhe ho achi acting karlete ho mujhe pgl mat bnao mera sab kuch authenticate hai aur mene kisi ke khene par ya kisi ke link par advance ya kuch aur nahi kiya mere pas sab recoved hai