1. How many shares do you want to remain in the float?

This is one of the most interesting topics to discuss because there are varied opinions about how many shares should be left in the float. Once again this depends on the capital structure of the shell you are buying. I have clients who will not purchase a shell unless they can get every share delivered. This is commonly referred to as a “Full Monty.”. These are shells that have approximately 20% to 30% free trading shares. The new Buyers of the shell would like to transfer those free trading shares from non affiliates of the previous company to their new non affiliate investors.

If you are purchasing a shell that has 51% to 90% delivery, then how much of a reverse split of those shares should you implement before you issue new restricted shares to your Officers and Directors?

Well it really depends on how many shares are outstanding and how many are going to be delivered to you to begin with. Let’s say, for example, that you have bought a shell that is delivering 51% of the shares. The company has 100,000,000 million shares outstanding and they are delivering 51,000,000 shares (51%) controlling interest to you. Let’s also assume that you want to value your company at $10,000,000 plus you want a capital raise of $2,000,000 and you would like the stock to start trading at $1.00 per share. There is a right way and a wrong way to handle the reverse split and capital structure.

Reverse Split Capital Structure - The Wrong Way

If you reverse your stock 10 for 1 you have 10,000,000 shares @ $1.00 per share. BUT here is your problem. You have 4,900,000 shares owned by the previous shareholders who not only still own 49% of your company but who are also going to hit your $1.00 bid until they crush your stock down to pennies a share. Why, you ask? Simple! They have lost all of their investment in the previous company and are looking to sell your stock to recoup some of their losses. If they crush your stock (which they will), then you will not be able to raise your $2,000,000 at $1.00 per share. You will most likely be raising the $2,000,000 at $.10 a share, thus having to issue an additional 20,000,000 shares. At the end of the day you will have 30,000,000 shares outstanding and you only own 5,100,000 shares or 17% of the company. Not exactly what you envisioned when you first started on this journey.

Reverse Split Capital Structure - The Right Way

If you take the same scenario but reverse split the stock 1000 for one you now have only 100,000 shares of which only 49,000 shares are owned by the previous shareholders. Now you issue 9,900,000 new shares to the Officers and Directors. You have retained 99.5% of the company and you do not have to worry about 49,000 shares hitting you in the marketplace. You can now raise your $2,000,000 @$1.00 per share. You will have to register those shares and those 2,000,000 shares will essentially become your float. Since those investors paid $1.00 per share there is a good chance your stock will start trading at or above $1.00 per share.

I can give several more examples but the reverse split and capitalization of your company is subject to your unique situation.

If you have additional questions please contact me at Ralph@ventanacapitalpartners.com

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