Sell additional shares: Overview, definition, and example
What does "sell additional shares" mean?
"Sell additional shares" refers to the process by which a company issues and sells new shares of its stock, typically to raise capital for business operations, expansion, or other purposes. This can occur through various mechanisms, such as public offerings (Initial Public Offerings or secondary offerings) or private placements. By selling additional shares, the company increases the total number of shares outstanding, which can lead to dilution of ownership for existing shareholders, though it raises funds that can be used for growth or other corporate needs.
For example, a company may decide to sell additional shares to finance a new product launch, pay off debt, or make an acquisition.
Why is selling additional shares important?
Selling additional shares is important because it allows companies to raise capital without incurring debt. This can be an attractive option when a company needs funding for growth, operations, or strategic initiatives but wants to avoid taking on more liabilities. The sale of additional shares can also signal confidence to the market, as it demonstrates the company’s ability to attract investors and generate funds for its future plans.
However, while selling additional shares can be a valuable tool for financing, it can lead to dilution, reducing the ownership percentage of existing shareholders. Therefore, companies must carefully consider the timing, amount, and method of issuing additional shares.
Understanding selling additional shares through an example
Imagine a company that has been growing rapidly and is now planning to expand into international markets. To fund this expansion, the company decides to sell additional shares through a secondary offering. As a result, the company raises $50 million, which will be used to build new facilities and hire staff. However, because new shares are issued, the percentage of ownership held by current shareholders is reduced, even though the company’s overall value may increase as a result of the capital infusion.
In another example, a startup might sell additional shares to venture capitalists or private investors to raise funds for product development and marketing. By selling a portion of ownership in the company, the founders gain the necessary funding to achieve growth while bringing in strategic partners who can help guide the business.
An example of a sell additional shares clause
Here’s how a clause related to selling additional shares might appear in a contract or agreement:
“The Company agrees to sell up to [number] additional shares of its common stock at a price of $[price] per share in a secondary offering. The proceeds from the sale of these shares will be used for [specific purpose, such as debt repayment, expansion, or working capital]. The Company shall issue the shares to investors who meet the criteria specified in this Agreement.”
Conclusion
Selling additional shares is a common method for companies to raise capital by issuing new equity. While it provides the company with necessary funding, it can also result in dilution of ownership for existing shareholders. Companies use this approach to finance growth, acquisitions, or other strategic initiatives, and it is an important consideration for both businesses and investors when evaluating the financial health and future prospects of a company.
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.