Wednesday, November 16, 2011

The logic of share pricing - 2

Shares and volumeI wrote yesterday about the tension between setting a high share price and setting a low one when going out for funds.  A further twist is that the decision drives the amount of funds that company raises.

Lets say the company is prepared to offer 30,000 shares of stock.  At a high share price, those shares bring in more money than they would at a lower price.  Obvious, but the converse, less evident, is also true: if the share value is low, it limits the funds that the company can raise.

In our case, the slope seemed to be about £50,000 per point of share price, or per £100,000 in overall company valuation.  So, if our milestones, asset growth, and risk reduction doubled the company’s value, doubling its share price, we were probably in a position to raise £500,000. 

That would fund a year’s operations, further suggesting that we would be back in the market in 9 months time.  The logic is cold that way: I’d rather have raised enough to reach first revenue, but we’re just not far enough along yet.

Even this doesn’t end the tweaks of getting to the right price.  Will the company’s story justify the change in price since the last fundraising?  Will enough current shareholders take up their preemptory rights to reassure new ones (we’d need six figures from our current angels)?   Will the holidays divert investors spending?

It can all be a bit daunting: it’s more complex and subtle than I would have thought.  But it also build confidence to get good counsel, to understand the process, and to reach a decision that works the way it should.

Students come to me asking if they are ready to enter business: another degree, an internship, maybe a consultancy, will give them the skills they need to succeed.

I think that they lack confidence more than they lack skill.

A learn has to be learned this as I go along, staying alongside good people with ears open and mind engaged. 

And the confidence comes simply from the trying and succeeding.

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