Additional paid-in capital (APIC) is a component of shareholders’ equity that reflects the price investors are willing to pay above the par value of issued stock.
APIC can be thought of as the surplus amount or premium a company receives from stock issued in an initial public offering (IPO) or a follow-on offering over and above the shares’ par value. It is important to note that additional paid-in capital only occurs in the primary markets; in other words, when the investor buys shares in a company directly from the company itself.
Transactions that occur in the secondary market, or between shareholders after the IPO, do not result in cash to the company. As such, they are not included in additional paid-in capital. APIC can apply to both common and preferred stock.
APIC represents the proceeds a company receives from a stock offering over and above the stock’s par value.
APIC is recorded in the shareholders’ equity portion of a company’s balance sheet.
The APIC formula is APIC = (Issue Price – Par Value) x Number of Shares Acquired by Investors.
In order to calculate APIC, you will need the following information:
The issue price at the time of the IPO or follow-on
The par value assigned to a share by the issuing company
The number of shares outstanding
APIC is derived from the difference in the issue price and par value, which will give you the premium per share resulting from the stock issue. The premium per share is then multiplied by the number of shares outstanding to give the company’s APIC value. The above relationship can be expressed by the following formula:
Additional Paid-In Capital = (Issue Price – Par Value) * Number of Shares Outstanding
By applying the formula above to all public offerings, you will be able to determine the APIC of an organization.
What is Par Value?
Par value is a nominal amount a company assigns to a common or preferred share of stock. The par value is determined by a company’s management even before there is a market value for the security. In many cases, companies may issue no-par-value stock. However, in some jurisdictions a company is required to have a par value, which represents the lowest price a company can sell a share. Because of this, most companies assign a very low par value, such as $0.01 per share.
On the other hand, the issue price is reflective of investor expectations of the company’s valuation. The difference between the par value and what the market thinks a share is worth determines the additional paid-in capital in the above equation.
APIC in the Real World
To frame our understanding of APIC, we will use a relatively recent real-world example. In early 2019, Beyond Meat Inc., a Los Angeles-based producer of plant-based meat alternatives, held its initial public offering.
Pre-IPO, Beyond Meat attributed a par value of $0.0001 per share, while the issue price was $25 per share. The number of common shares the company issued at IPO was 9.625 million. Putting it all together, the additional paid-in capital from common stock at Beyond Meat’s IPO would be:
APIC = ($25 – $0.0001) * 9,625,000
APIC = $240,624,037.50
Therefore, the cash collected as a result of additional paid-in capital at IPO attributed to common stock was approximately $240.6 million. The par value is a mere $962.50.
APIC in Financial Statements
APIC is accounted for in shareholders’ equity and serves to counterbalance the increase in the cash account on the assets side of the balance sheet. Along with retained earnings, it is generally the largest component of shareholder equity. In fact, additional paid-in capital will usually reflect a large majority of shareholder equity immediately after a company’s IPO, as retained earnings may have yet to accumulate.