tech-company, funding, private-companyI’m the CEO and Founder of a Tech Startup in India. This is the parent company and under this we provide services and products. Services would be Designing and Development. Products would be our own in-house apps that we’re building side by side along with client projects. In the future I would want to have multiple subsidiaries under the name of the parent company.
Now, to run a product successfully, one needs a lot of money for which I will need funding in the future. I want the product to be a subsidiary under the parent company. So, if anyone invests in the product, they invest in that subsidiary company and not in the parent company.
Q1. Is this a good approach?
Q2. Does the parent company own some of the subsidiary company?
Q3. All the money the subsidiary makes, will it be distributed amongst the members of that subsidiary only or some will go to the members of the parent company as well?
Ex: I own 35% of the parent company and 30% of the subsidiary company. Let’s say the parent company made 100,000 in profits and the subsidiary made 500,000 in profits.
Q4. Can i put some money from the profits of the subsidiary into the parent company for expenses and expansion?
Q5. Will the investor be investing in the parent company as well in this case?
Q6. If subsidiary 1 and subsidiary 2 have different investors but some of them are same, will this bring any trouble or will they own some of the parent company if they invest in more than 1 subsidiaries of the same parent company?
Q7. Will the members of the parent company be diluted if multiple investors invest in subsidiaries of that parent company?
Q1. Is this a good approach?
It depends on what you mean by good. I’m not sure what you are trying to accomplish. Investors probably would not prefer this because investing a lot of money in one product instead of a little money spread across many products is the opposite of diversification. Investors tend to like diversification.
Q2. Does the parent company own some of the subsidiary company?
Yes. By definition a parent company owns at least some part (if not all) of any subsidiary.
Q3. All the money the subsidiary makes, will it be distributed amongst the members of that subsidiary only or some will go to the members of the parent company as well?
That depends on how the parent/subsidiary relationship is structured. And the relative amount of outside shareholders. By outside shareholders I mean shareholders of the subsidiary that are not the parent company.
Generally speaking the distribution of dividends to shareholders is a decision made by the board of directors. Savvy investors will generally want to be represented on the board for the reason this question suggests — influencing the payment of dividends — among others.
Q4. Can i put some money from the profits of the subsidiary into the parent company for expenses and expansion?
It depends. Refer to above answer to question numbered Q3.
Q5. Will the investor be investing in the parent company as well in this case?
If the funds from the subsidiary are used to purchase stock in the parent company, then the answer is yes. The alternative is to have the subsidiary buy-back some of its own stock from the parent. In which case the answer would be no.
Q6. If subsidiary 1 and subsidiary 2 have different investors but some of them are same, will this bring any trouble or will they own some of the parent company if they invest in more than 1 subsidiaries of the same parent company?
This is a complicated question to answer. I’m not sure enough details are described about the ownership structure of each company in order to be able to answer it. I would just say this. Each parent and subsidiary should be able to stand on its own merits with respect to accounting of shares. It is possible to have cross ownership. But that might or might not be advisable depending on the situation and strategic goals of the investors and companies involved.
Q7. Will the members of the parent company be diluted if multiple investors invest in subsidiaries of that parent company?
No. Not if the subsidiaries are treated as separate entities for accounting purposes.
It appears you have more dreams than a real business under your control… You have asked so many questions that, without prejudice, it leads me to believe you’ve got little business experience.
Why don’t you concentrate on growing your product or service offering and employ someone else to do the company financial thinking.
I’m not going to go thru each question one by one suffice to say that 1)investors would be suspicious of you moving money from one product/investment into another and 2) managing the paperwork behind this and staying friendly with the taxman would consume so much time that it would reduce the time you could spend on growing the business (another reason for investors to be put off by this approach).
Parent company can invest in any other business, either subsidary or other entity. Profits are distributed to shareholders. If the parent company is a shareholder, then it will get some of the profits. If its not a shareholder, it thus will not get a share of the profits. An alternative revenue stream is where some technology is licensed from parent to subsidary, and subsidary pays regular fee’s.
Q4. Can i put some money from the profits of the subsidiary into the parent company for expenses and expansion? Q5. Will the investor be investing in the parent company as well in this case? If subsidary pays electricity, internet or the coffee company, do you think the investor has a share in these entities as well? Investor gets a share of the entity they invest in, not the business next door or across the road, or a business that is managed by your brother in law. So no, just because subsidary pays parent company or anyone else a fee, it does not transfer ownership.
Investors are unlikely to welcome this approach unless they have more money than sense (it has been known).
Spend your time on products and services and finding people who will spend money on those products and services. When you can afford it, employ someone to do financial thinking for you as your questions imply that your strengths lie elsewhere.
Best of luck!
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