As the ownership structure grows, more responsibilities and duties fall on each member of the ownership team. Some members of the team may be reluctant to take on additional responsibilities and duties because they fear they will not be compensated for their work.
This can be a problem as the owners continue to expand their company due to their confidence in the team members. As they grow in size, it becomes more difficult for some to receive a fair distribution of responsibility and compensation.
With enough growth, some may even decide it is time to move on and find a new company to invest in. If this happens before the investors reach an agreed-upon expansion plan, then there may be a loss of value for all involved. The investors might have to start from scratch when assessing potential investments.
They do not believe in the potential of the expansion
When a company is expanding its reach, it may be reluctant to issue more shares because it does not believe in the potential of the expansion.
If you look at the history of companies, most of them have failed before they ever try a new business model or location. They typically have one success before they realize what they are buying is worth paying for, and that is usually when they issue stock to buyers.
When new investors buy stock, the Company must prove to them that it has a future ahead of it by issuing more stock. If you look at past expansions, I bet you would find some failures.
They fear that the company will perform poorly with expansion
When an organization expands its business, it may need to issue new shares of stock to help finance the expansion. This is a good thing as the company gets more money and opportunity to perform and grow its business.
However, before enough stockholders agree to take on more equity, the company performs poorly. Then, when the company grows, some of those stockholders may be reluctant to approve another increase in equity due to what they saw back then.
That is why it is important for new investors into a stock to prove themselves by taking on some of the increased risk that comes with growth. New investors should be careful about how much they ask of them as they start investing in companies.
New Stock Issuers: It can be difficult for new shareholders to determine whether an existing shareholder is taking on enough risk when there are no precedents for expansion.
They want to keep their option open for a future sale of their shares
In some cases, a stockholder’s reluctance to approve an expansion of the company’s equity base may be due to his or her desire to have some option for leaving the company should business success warrants it.
For example, when a retailer decides to expand its ecommerce store offerings or opens a new location, it may choose to issue new shares of stock as part of its expansion. The new shares would represent an increase in the company’s equity base and would not expire until the retailer was entirely absorbed into a larger entity.
Theoretically, if business success warrants it, the retailer could re-issue more shares and increase its share count on the stock market. This could be attractive for potential investors as it looks like growth will continue without much change in share count.
Even with this theoretically available option for shareholders, some may be reluctant to take advantage of this because they want to keep their option open for a future sale of their shares.
They are concerned about the management pursuing the expansion
If a company needs to expand its operations, it must issue new equity securities. This requires the board of directors to vote to approve the expansion, which may be difficult when one looking at the company’s current operation is concerned.
A stockholder’s reluctance to expand the company by issuing new shares may be related to his or her perception of the growth strategy. If a stockholder perceives that expansion will come via the issuance of new shares, he or she may be hesitant to do so because they do not feel they are getting their fair share of the company.
It is important for a board of directors to have enough knowledge about a company to decide if it wants to expand in order for them to properly plan for and finance expansion.
They may lack confidence in the board approving the expansion
Issuing new stock can be a scary process for the board. If the expansion is not approved by the time additional space is needed, then some of the new stockholders may lack confidence in the board to expand capacity.
This can cause them to shy away from using their new stock in order to approve the expansion. In this case, only a large equity raise or an entirely new company could be sources of new capital.
Board members should pay close attention to how well their investors trust them to guide their company. If it seems like they are not doing enough to satisfy their investors, then they may wish to look for another job.
How successful a board member is at making decisions can also affect whether or not they are able to gain enough support from others. Board members who get less support from others than those who rely on only their own knowledge and ability.
They worry about additional risks associated with the expansion
One factor that may be holding stockholders back from issuing more shares is fear of additional risks associated with the expansion.
This worry may be stronger in smaller companies, where the risk/reward ratio can be more limited. However, this hesitation should not be cast as a negative, since larger companies tend to have more support from their shareholders.
By supporting the expansion of your company, you are showing support for your community and yourself, and allowing yourself to take some pride in what you do. If you feel compelled to expand your business, it is better to start with a small business or non-profit organization, so you have a foundation to start from.
Having enough confidence in your company’s ability to expand makes a difference in whether or not shareholders are willing to finance new projects.
