When investors invest in your business they subscribe for shares – they put money into your company and in return they get brand spanking crisp new shares. They hold onto these shares until they can later sell them at a profit, hopefully. Well that’s the idea. Since the company is probably not yet public the shares are not traded on a stock market, so selling them means a private buyer needs to be found if they want to sell.
So, at an investment round new shares are created and these initially belong to the company until investors subscribe for those shares. So the money investors pay for them belongs to the company, which is the point of the fund raising, to boost the company’s coffers.
However, at an investment round you might also want to consider selling old shares, which are shares that were issued when the company was formed and in any previous investment rounds. These old shares belong to the shareholders personally, so any sale of old shares means the shareholders get the money, not the company.
An investor may be loath to invest money if the money isn’t going into the company but to other shareholders. The company hasn’t benefitted at all, which isn’t the point of most investment rounds.
But I’ve been in situations where my company is doing very well; we are going for a new round of financing at a higher valuation than in the last round (see the butt on up-rounds), and in addition to creating new shares - a share issue - I’ve wanted to sell some of my own (old) shares – sometimes called a share transfer - at the same valuation. I’ve wanted to take some cash out of the business, which reduced my shareholding a bit.
This is perfectly possible and enables investors to get their hands on more shares; they end up subscribing for a mix of new and old shares. The shares each have the same value but may be in different classes – which are the attributes ascribed to them.
Normally, as the founder of your business, you’re last in the pecking order when it comes to taking money out of the business – that’s just the way it is. Investors like to get their money out first and that normally happens when the company is either sold or goes public. You have to wait quite a long time. However, remember that you could take some money out earlier by selling old shares in addition to the issuing of new shares at a future investment round.
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