The most common questions from startup founders before business registration with the Philippines SEC are:
- How do I keep control of my company, while still issuing shares to investors?
- How many shares should my company have?
A corporation was registered with an authorized capital of PHP One Hundred Thousand (100,000) divided into Ten Million (10,000,000) shares with a par value of One Centavo (PHP0.01) each.
For those of you, who think that the above is written in a foreign language, at the bottom of this article are the definitions of some financial terms that a startup CEO must know.
Philippine law (The Corporation Code of the Philippines) requires at incorporation that at least twenty five percent (25%) of the authorized capital stock of the corporation has been subscribed and at least twenty five (25%) of the subscribed has been paid.
Stockholders who only paid-in the 25% of 25% of their subscription will owe the corporation the remaining 75%. Best to have the all subscribed shares fully paid before selling unissued shares to investors.
How many shares to Founders?
Founders may allocate to themselves from 50% to 70% of the authorized capital leaving the remaining capital stock for investors and employee stock options.
E.g. Founders will subscribe to 5,000,000 shares with par value of PHP0.01 each or PHP50,000.00. This equals 50% of the authorized capital and 100% of the outstanding capital stock.
The Startup takes an Investor
Now what happens, when the company sells shares to an investor?
Let’s say an angel investor wants to invest PHP5,000,000 for 5% of the company.
We find ourselves with:
- Founders owning 95% of the company with 5,000,000 shares who invested PHP50,000
- Angel Investor owning 5 % of the company with 263,157 shares who invested PHP5,000,000.
The Pre-Money Valuation was PHP50,000 and we now have a Post-Money Valuation of PHP5,050,000 with 5,263,157 outstanding shares.
The shares issued to the angel investor are from the unissued capital stock, the investment will form part of the corporation’s capital.
The corporation now has a valuation of PHP5,050,000 or PHP0.96 per share, quite an increase from the PHP0.01.
Did the par-value increase?
No, the par-value per share has not changed. The par-value only changes if amended in the corporation’s Articles of Incorporation.
The corporation now has a paid-up capital of PHP5,050,000 composed of 5,263,157 shares with a par-value of PHP0.01 each. The increase in the valuation represents additional paid-up capital.
The startup still has 4,736,843 shares to offer future investors.
Documentary Stamp Tax (DST) must be paid to the BIR on all shares of stock issued by the corporation. The DST is calculated on the par-value of the shares and not on the price paid by the investors.
Definitions of terms to understand a corporation’s articles of incorporation:
- Par Value
The par value of a share of stock is the minimum value that a corporation may sell a share of its stock.
- Authorized Capital
The authorized capital is the maximum number of shares of stock that a company can issue with a specified par value. The authorized capital may be increased with the approval of at least two thirds of the shareholders.
- Subscribed Capital
The subscribed capital are the shares of stock that people or legal entities have promised to purchase from a corporation.
- Paid-in Capital
The paid-in capital (paid-up capital) is the actual amount of money stockholders have paid on the shares of capital stock for which they have subscribed.
- Outstanding Capital
The outstanding capital means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares.
Pre-Money: The pre-money valuation refers to the company’s valuation before the investment.
Post-Money: Post-money valuation is the value of a company after an investment has been made. This value is equal to the sum of the pre-money valuation and the amount of new equity.
Do you have questions about Startup Founders Business Registration? Post them on our face book page and we will answer them in part 2 of this article. Dayanan Business Consultancy Facebook