What is the Difference between the Premium Share Price Paid by the Investor and the Nominal Value of a Share and How is it Calculated?

The initial capital of a company denotes the total amount invested in the company at the time of its incorporation. In Turkey, the minimum capital required to establish a joint-stock company (Anonim Şirket) is TL 250,000. This initial capital is divided into shares, which are then allocated to the founding shareholders in proportion to the capital they've contributed. The number of shares, into which the capital is divided, is determined based on the nominal value assigned to each share.

Example 1:

Company X is a joint stock company established with a capital of TL 250,000 and three founding shareholders (A, B, and C). The company’s capital is divided into 250,000 shares with a nominal value of TL 1 each.

A.    Paid a capital of TL 125,000. They hold 125,000 shares and own 50% of the company.

B.    Paid a capital of TL 62,500. They hold 62,500 shares and own 25% of the company.

C.     Paid a capital of TL 62,500. They hold 62,500 shares and own 25% of the company.

Capital Increase with the Participation of Existing Shareholders

One method of financing a company is through increasing its share capital. This process doesn’t necessarily require external investors to join the company; instead, it relies on the contribution of funds by existing shareholders.

When a company decides to increase its capital, it issues new shares to those who subscribe to the increased share capital, thereby expanding the total number of shares in circulation.

Consequently, after such a capital increase, wherein existing shareholders participate proportionately to their holdings, the number of shares they own increases while maintaining their original shareholding ratios.

Example 2:

Let’s use company X from Example 1.

Existing capital: TL 250,000

Increased capital: TL 500,000

Share capital after the increase: TL 750,000

All shareholders participate in the capital increase in proportion to their shares.

A.    Commits to a capital of TL 250,000. They become the owner of 375,000 shares with a total value of TL 375,000.

B.    Commits to a capital of TL 125,000. They become the owner of 187,500 shares with a total value of TL 187,500.

C.     Commits to a capital of TL 125,000. They become the owner of 187,500 shares with a total value of TL 187,500.

The proportion of the shareholders in the company has not changed. 

Investment in a Company and Capital Increase with a Premium

In Example 2, the capital increase is based on the nominal value of shares, where one share is issued for each TL paid in. However, when an external investor joins the company through a capital increase, it becomes a capital increase with a premium.

This means that a premium is paid on the nominal value for each new share issued. The rationale behind such a premium lie in the fact that the market value of the company’s shares exceeds their nominal value.

From its inception, a company accumulates various assets such as products, services, intellectual property, and customers, all contributing to its actual market value. Therefore, when an investor injects capital into the company, they are essentially purchasing a stake in the company by paying a premium, based on its market value.

Failure to do so, as seen in scenarios where investors pay only the nominal value, results in the participation of existing shareholders becoming almost insignificant. This dynamic is illustrated more clearly through the following examples.

The calculation of the premium for each share takes into account the company's valuation and the total investment amount, determining the extent of ownership the investor will gain in the company.

It's important to note that in capital increases for investment purposes, the pre-emptive right of founding shareholders—their right to participate in the capital increase—is often restricted to allocate newly issued shares to the investor effectively.

Example 3:

Let us continue with company X.

The total share capital of the company was increased to TL 750,000. A total of 750,000 shares with a nominal value of TL 1 each were issued.

The pre-money valuation of the company is set at TL 60 million, and the investor (Y) decides to invest a total of TL 10 million in Company X based on this valuation.

Value before the investment (pre-money) of 1 share: 60 million (company value) / 750,000 (total number of shares) = 80 TL

After the investment:

Number of shares to be issued for Y: 10 million (investment amount) / 80 (value of one share) = 125,000

Total issued capital: TL 875,000

Total number of shares: 875,000

Partnership ratios:

A.    375,000 (number of shares of A) / 875,000 (total number of shares) = 43%

B.    187,500 (number of shares of B) / 875,000 (total number of shares) = 21.4%

C.     187,500 (number of shares of C) / 875,000 (total number of shares) = 21.4%

Y.     125,000 (number of shares of Y) / 875,000 (total number of shares) = 14.2%

Example 4:

If the same capital increase had been carried out at nominal value, the total issued capital of company X would have been TL 10,750,000, and a total of 10 million shares would have been issued for Y.

In this case, the shareholding ratios would be as follows:

A.    375,000 (number of shares of A) / 10,750,000 (total number of shares) = 3%

B.    187,500 (number of shares of B) / 10,750,000 (total number of shares) = 2%

C.     187,500 (number of shares of C) / 10,750,000 (total number of shares) = 2%

Y.     10,000,000 (number of shares of Y) / 10,750,000 (total number of shares) = 93%

Conclusion

To summarize, the premium paid by the investor for each new share is, in fact, the fee paid for that share. The reason why this fee is paid at a premium is to ensure that new shares are issued in the number corresponding to the fee paid by the investor.

Otherwise, as can be seen in Example 4, shares are issued to the investor at a nominal value far below the real value of the company, and the founding shareholders transfer the company to the investor with an almost negligibly reduced shareholding.