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Share And Share Alike

Sub-debt loans, price points, capitalist pigs unite, perfecting proposals

Business owners often fret over how many shares to issue when going public or seeking capitalization. But they may be putting the cart before the horse, according to experts. "First of all, there's no concrete answer," says James B. Arkebauer, founder of Venture Associates in Denver. "There's no formula. There are huge variables--the business owner looking for $100,000 to fund an ice cream store versus the person seeking $10 million to do an Internet IPO and all the variations in between."

The first step is to determine the amount of money you want to raise, then decide what percentage of your business you are willing to give up in return for the proceeds--all of which must be predicated upon valuation of your company. For an existing business, Arkebauer suggests, "quasi guidelines begin with the familiar P/E [price/earnings] ratio and the valuations other companies in the same industry are getting." To help with the latter estimate, research IPOs during the last 24 months.

Know, however, that "methods of valuation vary widely depending on whether you're approaching private investors, venture capital firms or institutional investors, or planning an initial public offering," cautions the author of Going Public (Dearborn Financial Publishing, $29.95, 800-621-9621).

When working with an underwriter toward an IPO, the per-share valuation, including number of shares, becomes part of the negotiations. The underwriter generally has a target dollar amount that conforms to the firm's typical deals--perhaps $7 to $12 a share for smaller brokers, $15 to $25 a share for larger firms. The number of shares issued will be adjusted to conform with the price per share so you still reach the desired capitalization.

However, the math changes if you're marketing your shares directly to investors, says San Francisco securities attorney and CPA Drew Field. "You decide on a price per share that you believe is best for the investor prospect you have selected," says Field, author of Direct Public Offerings: The New Method for Taking Your Company Public (Sourcebooks, $19.95, 630-961-3900). "Then you divide that number into the total dollar amount you expect to raise. After a little rounding, that will tell you the number of shares to be offered."

In addition to shares offered, remember that the underwriting broker traditionally is awarded warrants equivalent to 10 percent of the offering, and your board of directors and key employees should be equally provided for in stock-option plans. Most importantly, keep at least 60 percent for yourself.

Such determinations are more art than science. Says Arkebauer. "Variables are substantial from one business to the next and may carry more weight in one industry than another."

Paul DeCeglie ( is a former staff reporter for Journal of Commerce and American Banker. George M. Dawson ( is a small-business consultant and author of Borrowing to Build Your Business: Getting Your Banker to Say "Yes" (Upstart Publishing, $16.95, 800-235-8866). E-mail your questions to

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This article was originally published in the December 1999 print edition of Entrepreneur with the headline: Share And Share Alike.

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