Separate founder secondary proceeds from cash raised for the company

In a mixed financing, an investor may buy newly issued company shares and shares already held by a founder. The first component funds the company; the second pays the selling holder under the transaction terms. Identify the seller, purchaser, shares and payment recipient for each component before building an operating cash forecast.

The SEC's private-secondary-market guidance describes transactions in which investors sell existing securities to other investors. It also explains that private securities may carry resale restrictions. Have counsel determine the applicable restrictions and approvals for the actual transaction rather than treating an agreed price as sufficient authority to transfer the shares.

Assume a hypothetical investor commits $6 million: $4.5 million for a primary issuance and $1.5 million to buy a founder's existing shares. Suppose the company pays $200,000 of its own transaction expenses. Its net financing cash is $4.3 million. The founder's $1.5 million is not available to fund company payroll unless a separate, supported transaction later places money in the business.

If the budget treated all $6 million as company funding, it would show $5.8 million after the same expenses and overstate available cash by $1.5 million. Reconcile the cash schedule to the agreed payment recipients. A single closing agent or bank transfer arrangement should not erase the distinction between company and seller proceeds.

Assume the company has 12 million existing shares, of which the founder holds eight million. For this simple illustration, both components use a $3 share price and identical share equivalents; there are no conversions, pool changes or other issuances. The $4.5 million primary component creates 1.5 million shares, increasing the total to 13.5 million.

The $1.5 million secondary component transfers 500,000 existing founder shares to the investor. It does not increase the total share count. The founder ends with 7.5 million of 13.5 million shares, approximately 55.56%. The investor holds two million shares from the two purchases, approximately 14.81%. Other holders retain four million shares, approximately 29.63%.

If all $6 million were primary at the same assumed price, the company would issue two million shares and have 14 million outstanding. The founder would retain eight million, or approximately 57.14%, and company proceeds before expenses would be $6 million. This counterfactual makes the cash and ownership tradeoff visible without recommending a personal sale decision.

Primary preferred shares and transferred common shares may have different rights or prices. Use the actual securities in the live model and ask counsel to explain their treatment. Do not extend the identical-price illustration to a transaction whose documents distinguish the share classes.

Separate company expenses from costs attributable to selling holders. Have the appropriate advisers determine payment responsibility, approvals and tax consequences. If the company agrees to pay another party's cost, show that outflow explicitly instead of burying it in an unexplained difference between gross and net proceeds.

Ask how a change in the permitted secondary amount affects the primary subscription. An investor may cap total spending, or may have agreed independent amounts. Reducing one component does not automatically increase the other; the company needs an accepted revised allocation before budgeting additional cash.

Give management separate schedules for company cash, selling-holder proceeds and post-closing ownership. Check that the investor's total payment reconciles across them and that every share is either issued or transferred once. Keep pending subscriptions and transfers visibly conditional until the relevant closing requirements are met.

Base the spending authorization on the company's net receipts and timing. Send the final issuance and transfer records to legal and accounting after closing. A mixed financing can support company funding and holder liquidity, but the operating plan must use only the cash that actually belongs to the business.