Legal Definitions - paid-in surplus

Paid-in surplus, also known as contributed surplus or additional paid-in capital, refers to the amount of money a company receives from its shareholders for their stock that is above the stock's par value (or stated value). When a company issues shares, it typically assigns a nominal "par value" to each share, which is often a very low, symbolic amount. However, the actual price at which investors buy these shares is usually much higher.

The paid-in surplus is the difference between the actual selling price per share and the par value per share, multiplied by the total number of shares sold. This amount is recorded on the company's balance sheet as part of its equity and represents capital directly contributed by investors beyond the minimum legal or accounting par value requirement.

• Example 1: Initial Public Offering (IPO)

  A rapidly growing software startup, "CodeFlow Inc.," decides to go public. They issue 10 million shares to the market, each with a par value of $0.01. Due to high demand and strong investor confidence, the shares are sold to the public for $25.00 each.

  How it illustrates the term: The paid-in surplus for CodeFlow Inc. would be calculated as ($25.00 - $0.01) * 10,000,000 shares = $24.99 * 10,000,000 = $249,900,000. This nearly $250 million represents the additional capital investors contributed to the company beyond the nominal par value of the shares, directly increasing the company's equity.

• Example 2: Established Company Issuing New Shares for Expansion

  A well-established automobile manufacturer, "DriveRight Corp.," needs to raise capital to build a new factory. They decide to issue 5 million new shares to institutional investors. The existing shares of DriveRight Corp. have a par value of $1.00, and the new shares are sold for $60.00 each.

  How it illustrates the term: In this scenario, the paid-in surplus generated from this new stock issuance is ($60.00 - $1.00) * 5,000,000 shares = $59.00 * 5,000,000 = $295,000,000. This $295 million is the paid-in surplus, reflecting the significant additional capital contributed by investors to fund the company's expansion, over and above the shares' par value.

• Example 3: Private Company Raising Capital (Series B Funding)

  A private biotechnology firm, "BioGen Innovations," completes a Series B funding round to finance its clinical trials. They issue 2 million preferred shares to a consortium of venture capital firms. These preferred shares have a par value of $0.05, and the venture capitalists invest $15.00 per share.

  How it illustrates the term: The paid-in surplus for BioGen Innovations from this funding round would be ($15.00 - $0.05) * 2,000,000 shares = $14.95 * 2,000,000 = $29,900,000. This nearly $30 million is the paid-in surplus, representing the substantial capital contributed by the venture capitalists that exceeds the par value of the preferred shares, providing crucial funding for the company's research and development.