Example Calculation: Reverse Merger Structure and Investor Participation
This example illustrates how a reverse merger can be structured for an AI start-up with international expansion plans, a required financing volume of USD 50,000,000 and a bridge investor who provides USD 5,000,000 and receives ten times that amount in listed shares after the merger.
1. Basic Scenario and Objectives
The key assumptions are:
- AI start-up with strong global growth potential.
- Required new capital via the stock market after the reverse merger: at least USD 50,000,000.
- Additional capital reserve: approx. USD 25,000,000 (authorised but not yet issued shares).
- New owners (start-up shareholders) must hold at least 76% of the voting rights after the transaction (no preferred shares).
- The current owners of the shell company wish to retain 5% of the shares.
- A bridge investor provides USD 5,000,000 and receives shares worth USD 50,000,000 (10x ROI) immediately after the reverse merger.
- The transaction coordinators / structuring team receive shares worth USD 15,000,000.
For this example, we assume that the market will value the company at USD 500,000,000 immediately after the reverse merger. This is the so-called post-merger market capitalisation.
In addition, we assume an initial indicative share price of USD 5.00 per share. At a valuation of USD 500,000,000 and a price of USD 5.00, this results in:
Total issued shares after the reverse merger: 100,000,000 shares
2. Target Capital Structure after the Reverse Merger
Based on the above assumptions, the post-merger equity can be allocated as follows:
| Stakeholder | Percentage | Number of Shares | Value at USD 5.00 per Share |
|---|---|---|---|
| Start-up founders / previous private owners | 76% | 76,000,000 | USD 380,000,000 |
| Bridge investor (reverse merger financing) | 10% | 10,000,000 | USD 50,000,000 |
| Transaction coordinators / structuring team | 3% | 3,000,000 | USD 15,000,000 |
| Shell sellers (remaining stake) | 5% | 5,000,000 | USD 25,000,000 |
| Existing public float of the shell | 6% | 6,000,000 | USD 30,000,000 |
Total: 100% = 100,000,000 shares = USD 500,000,000 market cap.
3. How the 10x Return for the Bridge Investor Works
The bridge investor provides USD 5,000,000 before the reverse merger in order to finance:
- Acquisition of the shell company (control block).
- Legal, audit and regulatory costs (SEC, FINRA, stock exchange).
- Structuring, coordination and execution of the entire reverse merger process.
- Travel, meetings and implementation expenses for the transaction team.
- Initial marketing, investor-relations and expansion measures for the new listed company.
Breakdown of the USD 5,000,000 bridge financing
| Use of Funds | Approximate Amount (USD) | Description |
|---|---|---|
| Reverse merger and shell acquisition | 3,000,000 | Purchase of the shell (control block), legal counsel, audits, SEC and FINRA filings, transfer agent, transaction coordination, travel and implementation costs. |
| Marketing of the new company | 500,000 | Branding, website, presentation material, communication with the market. |
| Marketing of the share sale / investor relations | 500,000 | Capital markets communication, roadshows, investor outreach and IR support. |
| Initial business expansion | 500,000 | First business development steps after the listing, key hires, infrastructure. |
| General reserve | 500,000 | Buffer for unforeseen costs and strategic flexibility. |
Total bridge financing: USD 5,000,000
In return, the investor receives a fixed allocation of 10,000,000 shares in the new listed company. At an assumed market price of USD 5.00 per share, this corresponds to a value of USD 50,000,000.
Effective investment multiple:
- Investment: USD 5,000,000
- Value of the share package: USD 50,000,000
- Result: 10x return on investment (10x ROI) in one transaction.
The investor can then decide whether to sell the shares gradually on the market, to hold a portion for further upside, or to negotiate a buyback with the company or institutional investors.
4. Capital Raising after the Reverse Merger
In addition to the 100,000,000 issued shares, the company should authorise a higher number of shares in its charter, for example:
- Authorised shares: 150,000,000 common shares.
- Issued after the merger: 100,000,000 shares (see cap table above).
- Remaining authorised, not yet issued: 50,000,000 shares.
At a price of USD 5.00 per share, these 50,000,000 additional shares represent a theoretical future capital-raising capacity of:
50,000,000 × USD 5.00 = USD 250,000,000
From this amount, at least USD 50,000,000 can be raised in one or several tranches via the stock market, and an additional reserve of approx. USD 25,000,000 (and more) is available for future expansion financing. The start-up founders still retain the majority of voting rights, as they initially hold 76% and are only gradually diluted by future capital increases.
5. Summary of the Example
- The bridge investor finances the reverse merger and initial growth with USD 5,000,000.
- Of this, approx. USD 3,000,000 cover the shell acquisition and all transaction, legal and regulatory costs.
- Approx. USD 2,000,000 are available for marketing the company, marketing the shares, initial expansion and general reserves.
- After the reverse merger, the company is valued at USD 500,000,000 with 100,000,000 issued shares at USD 5.00 each.
- The investor receives shares worth USD 50,000,000 (10,000,000 shares), which corresponds to a tenfold return on capital.
- The start-up founders retain at least 76% of the voting rights and thus maintain strategic control.
- The shell sellers keep 5%, the coordinators receive 3%, and the former public float remains invested.
- The company can raise at least USD 50,000,000 in fresh capital via the stock market after the reverse merger, with further reserves available.
This structure shows how a professionally designed reverse merger can simultaneously:
- Provide short-term, high-multiple returns for the bridge investor,
- Secure the controlling interest of the start-up founders,
- And create sufficient capacity for future growth financing via the capital markets.