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I think an answer to the following simplified question should help me. If you would like to help me with my more specific scenario, then you can read the detailed question at the end. Thanks.

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Simplified version:

If Person-A is the sole owner of a limited liability private company. Then one day he gets an investor, Person-B, and sells him 20% of the company for his investment. Then, later, Person-A agrees to sell a further 10% of the company to another investor, Person-C...

Do both Person-A and Person-B proportionally share a loss of their shares when Person-C gets their shares, or are Person-B's shares fixed and secured to him, and therefore only Person-A bears the affects of the transfer to Person-C?

I hope that is clear and succinct enough. Thank you.

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My specific scenario question is:

I have recently begun a new startup. It is basically just me and a friend as partners. But we both acknowledge that I should be entitled to a larger portion of the company, so we have agreed to an 80-20 split. His 20% is broken up as: 5% for being a co-founder; another 5% as reward for his ongoing role as an advisor; and 10% which he has bought.

The company is officially only in my name alone. When it comes time to give my partner his share of the profits, the accountant will officially incorporate him then to give him his share. (This is for a tax benefit to all, which we both agreed to.)

We are trying to understand though... If we sell a share of the company to an investor, then do I solely bear the 'loss' of shares, or do we share it proportionally. And if proportionally, then does the friend 'suffer his loss' from all his 20% or just 5%, 10%, or 15%?

Thanks!

Myer

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closed as off-topic by The Wandering Dev Manager, gnat, keshlam, paparazzo, DJClayworth Mar 8 '16 at 17:35

  • This question does not appear to be about the workplace within the scope defined in the help center.
If this question can be reworded to fit the rules in the help center, please edit the question.

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    I'm voting to close this question as off-topic because it's a better fit at startups.stackexchange.com – The Wandering Dev Manager Mar 8 '16 at 8:56
  • @TheWanderingDevManager: Nitpick - "it's a better fit at X" is not a close reason (see FAQ). Still, this is not really about the workplace as a "member of the workforce", but about a problem of ownership, so I agree it's off-topic here. Might fit on startups.SE, or on law.SE. – sleske Mar 8 '16 at 10:19
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    I'm voting to close this question as off-topic because it is not within the definition of "workplace questions" we've been using. – keshlam Mar 8 '16 at 13:50
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A owns 100% of the company. The company has some value. So after selling 20% of the company to B, A owns 80%, B owns 20%, and a lot of cash moved from B's pocket to A's pocket.

After the sale of another 10% to C, A owns 80%, B owns 20%, C owns 10%, and some more cash moved from C's pocket to A's pocket.

The company is separate from its owners. As the owner of 80% of the company, you can surely sell your property. If your friend owns 20% of the company, you can surely not sell his property.

There is a different situation if you have an investor: Say the company has $10,000 in its bank account, you feel that isn't enough, there should be $110,000. You find someone willing to pay $100,000 and everyone agrees to put that money into the company bank account, so the company will be worth $100,000 more afterwards. Everyone needs to agree what the company is worth before the investment (say $400,000) and after the investment ($500,000). In that case, you would make the sale in such a way that the new investor gets 20% of the company, and since you both benefit from the value added to the company, you both lose 20% of the share, making it 64%, 16%, 20%. None of this is automatic; you have to agree about these percentages beforehand.

  • "A owns 80%, B owns 20%, C owns 10%" - so they own 110% company? That doesn't add up. I think you mean A owns 70%, because they sold 10 of their 80 percents to C. – Philipp Mar 8 '16 at 9:59
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Person-A agrees to sell a further 10% of the company to another investor, Person-C.

It depends what capacity person A is acting in. Person A can act as an individual. As the majority shareholder and almost certainly a director of the company he will also likely have substantial power to act on behalf of the company.

Person A acting as an individual can sell some of his personal share. In this case person A would get the money from the sale and person B's share would be unaffected.

The company (following whatever procedures are set down by local laws and the companies own bylaws) can issue new shares and sell them. The money from such a sale would go to the company. For example say a company had 90 shares, 72 of which (80%) were owned by "Person A" and 18 of which (20%) were owned by "Person B". The company issues 10 new shares and sells them to "Person C". Person A still has 72 shares but these now represent 72% of the company. Similarlly person B still has 18 shares but these now represent 18% of the company.

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