Stock split vs Reverse stock split
Which is better for your company and how it affects long term plans.
Many of you may have heard of MoviePass, an innovative way to bundle and reduce the expense of acquiring viewership on the backs of a few big blockbusters and the natural inclination of people to not fully utilize monthly memberships. Nevertheless, still a great product from what I hear, especially if you’re a movie buff or have a lot of time to kill.
As mentioned in this Business Insider story
https://markets.businessinsider.com/news/stocks/moviepass-owner-hmny-stock-price-reverse-stock-split...The product’s parent company, Helios and Matheson, has approved a reverse stock split for the parent company, with shareholders trading in 250 shares for 1 share, raising the price per share from $.08 to $21. This is a relatively common practice for two reasons. Firstly, having a stock price with whole numbers just looks better. Better to investors, better to shareholders, better to media, and to stock exchanges, if your company is traded publicly. Secondly, and perhaps more importantly, it looks good to investors. Investors often times require certain price per shares in their portfolio. This is often the case when you have an early stage company with Seed or Series A investors coming aboard with the power and influence to shape the structure of a startup company to their liking.
A stock split, which is just as common, is the practice of increasing the number of shares held by each shareholder, and proportionally increasing the number of shares issued by the entire company. Thus, each shareholder has the same proportion of a bigger pie, resulting in an equivalent value held. At the end of the day, it is a cosmetic maneuver which may actually have very meaningful consequences.
A reverse stock split is just that; decreasing the size of the pie with each of the shareholder receiving a smaller yet proportional piece of the company pie. The result here is a higher stock price, which often leads to a perception that the company’s performance is on an upward trend or on more solid footing.
In this case, MoviePass is looking to take on capital, likely venture capital, in order to boost marketing and revenue. This move should help them do that by fitting into VC portfolios as well as remaining on the NADAQ, which is surely an important aspect of what makes the company attractive.
Keeping these subtleties in mind when forming your company early on can prevent delays in funding and irritating legal costs to execute a stock split or reverse stock split. When drafting articles for your corporation, have a vision of what you think your company can be, and what may be required (angel, VC, institutional funding) to reach your goals. Further, what type of exit strategy you foresee (selling your entire company, going public, long term owner operated, etc.). These types of decisions will have a major influence on how you structure your company.
If you didn’t prepare your company the best way to accomplish your goals, seek a business/tax lawyer to help you prepare to capitalize or grow your business.