Additional shares: Overview, definition, and example
What are additional shares?
Additional shares refer to new shares issued by a company beyond the original amount that was initially authorized or issued. These shares may be offered to existing shareholders or new investors, often through a secondary offering, rights issue, or stock split. Issuing additional shares can be done to raise capital for business expansion, pay down debt, or fund other company activities. When additional shares are issued, the total number of shares outstanding increases, which can impact the value and ownership percentage of existing shareholders.
For example, a company might issue additional shares to raise funds for new projects, increasing the total number of shares in circulation.
Why are additional shares important?
Additional shares are important because they provide companies with a way to raise capital without taking on more debt. By issuing new shares, a company can attract new investors, strengthen its financial position, or finance growth initiatives. However, the issuance of additional shares can also dilute the value of existing shares, as the earnings or assets of the company are now divided among a larger number of shares. As a result, companies must carefully consider the potential impact on shareholders before issuing additional shares.
Understanding additional shares through an example
Let’s say a company has 1 million shares outstanding, and each share is worth $10. If the company decides to issue an additional 200,000 shares to raise capital for a new project, the total number of shares outstanding will increase to 1.2 million. If the company successfully raises funds and the project leads to higher profits, the value of the company—and potentially each share—could increase. However, the value per share may be diluted initially because the same amount of profit is now divided across more shares.
In another example, a startup may issue additional shares to attract a new investor who is willing to inject capital into the business. The new investor purchases shares at the market price, but the existing shareholders may see their ownership percentage decrease as a result of the new shares.
An example of an additional shares clause
Here’s how an additional shares clause might appear in a shareholder agreement or contract:
“The Company reserves the right to issue additional shares to raise capital or for other corporate purposes. Any issuance of additional shares shall be made in accordance with applicable securities laws and may result in dilution of existing shareholders’ ownership percentages.”
Conclusion
Issuing additional shares is a common strategy used by companies to raise capital and support business growth. However, it comes with the tradeoff of potentially diluting the value of existing shares. It’s important for both companies and shareholders to understand the impact of issuing additional shares on ownership percentages, share value, and overall company performance.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.