How do Founder Shares Work?
On the day of IPO, all SPAC founder shares are transformed to (exchanged with) listed common shares at a ratio of one-fourth of the IPO’s proceeds.
For example:
A SPAC plans to collect USD $100 million IPO from institutional investors.
Institutional investors have been attracted to the company during the preceding roadshow and have committed to making investments. That’s the starting signal to get the SPAC listed as a public company and float its IPO.
On the day of IPO, 10,000,000 common shares at USD $10 are offered and bought by institutional investors, who buy these shares for USD $100 million. Using a share price of USD $10 is common practice for SPAC IPOs.
Simultaneously, all the founder shares of the SPAC are exchanged with listed common shares of the SPAC, in addition to the 10,000,000 common shares mentioned above. The amount of listed common shares in exchange with the SPAC’s founder shares is always one fourth (= 25%) of the listed common shares offered and sold to the institutional investors.
In our example that will result in 2,500,000 listed common shares at a value of USD 10 each, with a total value of USD 25,000,000.
These listed common shares with a total value of USD $25,000,000 belong to the SPAC’s pre-IPO shareholders. As 25% of the pre-IPO SPAC founder shares belong to the SPAC sponsor, the SPAC sponsor is now holding 25% of the 2,500,000 exchanged shares, which is 625,000 listed common shares at a total value of USD $6,250,000.
In a nutshell, the SPAC sponsor received listed common shares at a value of USD $6,250,000 in exchange for his/her USD $5,100,00 sponsor capital provided, providing a capital growth of 22.5%.