How do profit participation rights change my cap table?
Example calculation of stake and dilution.
Issuing profit participation rights does not change the share capital of the GmbH, unlike a capital increase. Economically, however, it dilutes the existing shareholders in the same way. The following example shows how many profit participation rights you need to issue for a given stake and how dilution is calculated.
Example calculation
Mustermann GmbH plans to bring in a venture capital investor (VC) via profit participation rights. The VC requires a stake of at least 20% in the company.
Starting point:
- Share capital: €25,000
- two shareholders (Alice and Bob) with 12,500 shares each
- Nominal value per share: €1
Since the VC is to receive 20% via profit participation rights, the current share capital corresponds to 80% of the future fully diluted capitalization:
25,000 / 0.8 = 31,250
The difference is the number of profit participation rights to be issued:
31,250 – 25,000 = 6,250 profit participation rights
After the issuance, the VC holds exactly 20% of the company.
Dilution of the existing shareholders
To calculate the dilution, you set the existing shares in relation to the new fully diluted capitalization:
- Alice: 12,500 / 31,250 = 40%
- Bob: 12,500 / 31,250 = 40%
After the issuance, Alice and Bob each hold 40% instead of 50%, so each is diluted by 10 percentage points.
What is fully diluted capitalization?
Fully diluted capitalization (also called the fully diluted cap table, at beel also "virtual total capital", VGK) is the total of all shares that
- have already been issued,
- may be exercised in the future, or
- may arise through conversion, for example via the put option on profit participation rights, ESOPs or convertible loans.
It is the basis for calculating ownership percentages.