What is APIC (Additional Paid-In Capital)?
APIC (Additional Paid-In Capital) 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 initial profit a company makes from issued stock in an Initial Public Offering (IPO). It is used to represent what investors are willing to pay above the par value denominated by the company on a share of the stock. 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 profit for the company. As such, they are not included in additional paid-in capital. APIC can apply to both common and preferred stock.
- APIC (Additional Paid-in Capital) is a representation of the cash inflow from the difference in the issue price of a stock and its par value.
- Additional paid-in capital is recorded on 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;
- The par value assigned to a share by the issuing company; and
- The number of shares outstanding.
The additional paid-in capital is derived from the difference in the issue price and par value, which will give you the profitability per share resulting from the stock issue. The profitability 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?
While the par value is intuitive in that it is a value assigned by the company to each share upon issuance, there are some specific intricacies of par values that help to inform our understanding of APIC. Par value is analogous to an “ask” on a secondary market. It is the amount a company “asks” for a share of equity in its company.
The issue price is reflective of the market value or the assessment of investors as to what the value of a share in the company is worth. The disparity between what a company asks and what the market thinks of a share is the resulting per share profitability in the above equation.
The par value is determined by a company’s management even before there is a market value for the security. In order to minimize any potential legal liability, issuing companies will minimize the par value as much as possible to avoid any downside risk.
Usually, it will mean issuing shares at a par value that is the smallest denomination of currency possible, i.e., 1 cent, $0.01 in the United States. In some jurisdictions, it is mandated by law that shares are issued at the smallest value possible, while in others, shares cannot be sold under par value, pushing companies to issue stocks at the very small par value as a result.
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 $240.6 million.
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 have yet to accumulate.
This initial APIC can later act as a “cushion,” or “safety net,” against any potential losses in net income. It is important to note that, despite the interaction with net income, the APIC appears only on the balance sheet, not on the income statement.
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