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How does it work when somebody invests in my business?
How does compounding of annual interest work?Recommended education path for a future individual investor?How does a preferred share “Annual Concurrent Retraction Privilege” work?How does a Non US citizen gain SEC Accredited Investor Status?How does pre-market trading work?Investing/business with other people's money: How does it work?Do I need an accountant when starting a business? [NYC]How does a motif from Motifinvesting work?How does gearing work in an unlisted property fund?How does compound interest work with stocks?
Lately I've been curious on how exactly does investing in a product works, and I've been thinking about this scenario:
Let's say I'm creating some mobile application and I manage to get $1m of investment money. In the following year, the application turns out to be a huge success and I get an offer of $30m to sell it. If I decide to sell it, where is the investor involved in that process? Does the investor get a part of that $30m?
I would also appreciate some useful links that explain the process.
investing start-up
asked yesterday
DinoDino
21114
add a comment |
Lately I've been curious on how exactly does investing in a product works, and I've been thinking about this scenario:
Let's say I'm creating some mobile application and I manage to get $1m of investment money. In the following year, the application turns out to be a huge success and I get an offer of $30m to sell it. If I decide to sell it, where is the investor involved in that process? Does the investor get a part of that $30m?
I would also appreciate some useful links that explain the process.
investing start-up
asked yesterday
DinoDino
21114
3
See en.wikipedia.org/wiki/Seed_money and en.wikipedia.org/wiki/Venture_capital.
– ceejayoz
yesterday
2
Have you ever watched Shark Tank? It's over-simplified, but you do see how the investors "value" companies and ask for equity or royalties in exchange for their investment. Edit: Shark Tank is a US show, but there are similar shows in other countries.
– JPhi1618
yesterday
You're asking whether accepting investment means you're necessarily selling them a (large) portion of equity, not just a fractional revenue-share. Generally, yes. Even with angel investors.
– smci
19 hours ago
2
Is this on-topic?
– stannius
19 hours ago
add a comment |
Lately I've been curious on how exactly does investing in a product works, and I've been thinking about this scenario:
Let's say I'm creating some mobile application and I manage to get $1m of investment money. In the following year, the application turns out to be a huge success and I get an offer of $30m to sell it. If I decide to sell it, where is the investor involved in that process? Does the investor get a part of that $30m?
I would also appreciate some useful links that explain the process.
investing start-up
asked yesterday
DinoDino
21114
Lately I've been curious on how exactly does investing in a product works, and I've been thinking about this scenario:
Let's say I'm creating some mobile application and I manage to get $1m of investment money. In the following year, the application turns out to be a huge success and I get an offer of $30m to sell it. If I decide to sell it, where is the investor involved in that process? Does the investor get a part of that $30m?
I would also appreciate some useful links that explain the process.
investing start-up
investing start-up
asked yesterday
DinoDino
21114
asked yesterday
DinoDino
21114
edited 17 mins ago
Dino
asked yesterday
DinoDino
21114
asked yesterday
DinoDino
21114
asked yesterday
DinoDino
21114
21114
3
See en.wikipedia.org/wiki/Seed_money and en.wikipedia.org/wiki/Venture_capital.
– ceejayoz
yesterday
2
Have you ever watched Shark Tank? It's over-simplified, but you do see how the investors "value" companies and ask for equity or royalties in exchange for their investment. Edit: Shark Tank is a US show, but there are similar shows in other countries.
– JPhi1618
yesterday
You're asking whether accepting investment means you're necessarily selling them a (large) portion of equity, not just a fractional revenue-share. Generally, yes. Even with angel investors.
– smci
19 hours ago
2
Is this on-topic?
– stannius
19 hours ago
add a comment |
3
See en.wikipedia.org/wiki/Seed_money and en.wikipedia.org/wiki/Venture_capital.
– ceejayoz
yesterday
2
Have you ever watched Shark Tank? It's over-simplified, but you do see how the investors "value" companies and ask for equity or royalties in exchange for their investment. Edit: Shark Tank is a US show, but there are similar shows in other countries.
– JPhi1618
yesterday
You're asking whether accepting investment means you're necessarily selling them a (large) portion of equity, not just a fractional revenue-share. Generally, yes. Even with angel investors.
– smci
19 hours ago
2
Is this on-topic?
– stannius
19 hours ago
3
3
See en.wikipedia.org/wiki/Seed_money and en.wikipedia.org/wiki/Venture_capital.
– ceejayoz
yesterday
See en.wikipedia.org/wiki/Seed_money and en.wikipedia.org/wiki/Venture_capital.
– ceejayoz
yesterday
2
2
Have you ever watched Shark Tank? It's over-simplified, but you do see how the investors "value" companies and ask for equity or royalties in exchange for their investment. Edit: Shark Tank is a US show, but there are similar shows in other countries.
– JPhi1618
yesterday
Have you ever watched Shark Tank? It's over-simplified, but you do see how the investors "value" companies and ask for equity or royalties in exchange for their investment. Edit: Shark Tank is a US show, but there are similar shows in other countries.
– JPhi1618
yesterday
You're asking whether accepting investment means you're necessarily selling them a (large) portion of equity, not just a fractional revenue-share. Generally, yes. Even with angel investors.
– smci
19 hours ago
You're asking whether accepting investment means you're necessarily selling them a (large) portion of equity, not just a fractional revenue-share. Generally, yes. Even with angel investors.
– smci
19 hours ago
2
2
Is this on-topic?
– stannius
19 hours ago
Is this on-topic?
– stannius
19 hours ago
add a comment |
2 Answers
2
active
oldest
votes
Almost nobody would just give you a pile of money with no expectation of return. In most cases you exchange equity in the company for the investment. A simple example might be that I estimate your idea/company to be worth $4M currently, so for $1M I want 25% equity. When you sell for $30M, I get 25% of the proceeds. If you go belly up, I likely don't recoup my investment, but 25% of whatever assets can be sold.
There are other arrangements, too. My investment might earn a royalty on every sale you make, without me having any equity. The investment could just be a loan that you repay with interest. There are many options and nuances; that's why lawyers are usually involved.
How much power the investor has depends on how much you give them in exchange for their investment. There are plenty of stories of founders getting themselves ousted by investors after giving up too much control.
answered yesterday
Hart COHart CO
33.7k57995
19
Shark Tank seasons 1 through present summed up in 3 paragraphs. Brilliant, have my +1.
– MonkeyZeus
yesterday
2
@Vlad274. If something has a value of $100, would you consider it "investing" if you bought it for $100? No - you'd just break even. If you think it has a value of $100, and you bought it for $80, then you're expecting to earn $20. Similarly, if you think 25% equity has a value of 1 million dollars, you wouldn't really want to actually pay $1 million for it - you're just breaking even. The reason investors invest is because they think the value of the company is more than 4 million, and the 25% equity is worth more than the 1 million they're paying.
– Kevin
yesterday
16
@Kevin If I bought 25% for $1M I'm giving the company a $4M valuation. I expect the future value to be significantly higher, but if current value isn't $4M then one party got a better deal than the other.
– Hart CO
yesterday
28
@Kevin ...I think that is investing. I'm buying something at the rate that it is right now on the assumption/guess/knowledge that it will increase in value. That's, like, the definition of investing.
– John Doe
yesterday
6
@Kevin Generally investing involves paying the current market rate for something, with the expectation that it will go up in the future. Buying below market rate is awesome when possible, but the "go up in the future" part is generally more important. Buying something worth 100x for only 80x currency, when you don't have a strong expectation of the thing increasing in value, is actually not a very good investment unless you can easily resell it immediately.
– GrandOpener
yesterday
|
show 13 more comments
Typically, if you create a business that wants investors, you will issue stock in the company. One unit of stock is called a share. You decide how many shares there will be and how much each share is worth. The total value of all the shares represents the market value of your business.
Say you issue 1 million shares in your company, and you value each share at $4. That makes the market value of your company $4 million. If someone comes along and wants to invest $1 million in your company, it's a simple matter of selling them 250,000 shares.
At some point in the future, your company is doing really well and someone offers you $30 million for it. There are 1 million shares, so that means each share is now worth $30. Your investor owns 250,000 shares, so their $1 million investment is now worth $7.5 million. You still own the other 750,000 shares, so you get the other $22.5 million.
That's a really simple example, but it illustrates the basic idea of investing in stock of a company.
answered 21 hours ago
MohairMohair
23813
Note that it's not a simple matter of selling 250k shares of 1M. If you are selling shares, then the shares have to come from somewhere. Either they are being sold by someone who already owns them, which results in the money not actually going to the company, or the company creates/sells shares that are not owned by anyone other than the company (this latter is the usual intent for raising capital). Doing the latter dilutes the ownership share represented by the current outstanding shares. This can be that new shares are created, resulting in 333,333 new shares, for 1,333,333 shares total.
– Makyen
19 hours ago
Alternately, the shares could already exist, or be authorized, but be owned by the company/not issued. In which case, only 750,000 shares are owned by others. However, their effective ownership percentage is reduced when the additional shares are sold by the company. In other words, in that scenario 750k shares represented 100% ownership of the company, but once the additional 250k shares are sold, the 750k shares represent 75% ownership.
– Makyen
19 hours ago
Doesn't the investment dilute ownership in (theoretically) exact proportion to how much money the investor invests? Per the comments on the other answer - investor pays $1 million for 25% of a company now valued at $4m. The company just got $1m cash on the books, so, more or less they were worth $3m before the investment. They might have a smaller share but it's of a pie that's exactly embiggened enough that they break even. In fact the newly capitalized company could potentially be worth more than it was before (like, maybe it was only worth $2m) because now it can sieze opportunity!
– stannius
19 hours ago
@Makyen In my simple example, yes, it is that simple. There is one owner of the company who owns all 1 million shares. He sells 25% of his shares to someone else. True, the proceeds of that sale go to the person who owns them, not the company, but in my example, the owner is effectively the company, so they are one and the same.
– Mohair
7 hours ago
@Mohair The company and owners of the stock are definitely not one and the same. One major point of having a corporation is to establish a separate legal entity from the person or persons who own the stock. Sometimes, that's the entire point of the corporation (obviously, if you're seeking investment, it's not the entire point for this company). However, strictly maintaining that legal separation is critical. While someone might be willing to purchase stock that's privately held, that's not what's normally considered investing in the company. It's generally considered investing in the stock.
– Makyen
5 hours ago
|
show 1 more comment
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2 Answers
2
active
oldest
votes
2 Answers
2
active
oldest
votes
active
oldest
votes
active
oldest
votes
Almost nobody would just give you a pile of money with no expectation of return. In most cases you exchange equity in the company for the investment. A simple example might be that I estimate your idea/company to be worth $4M currently, so for $1M I want 25% equity. When you sell for $30M, I get 25% of the proceeds. If you go belly up, I likely don't recoup my investment, but 25% of whatever assets can be sold.
There are other arrangements, too. My investment might earn a royalty on every sale you make, without me having any equity. The investment could just be a loan that you repay with interest. There are many options and nuances; that's why lawyers are usually involved.
How much power the investor has depends on how much you give them in exchange for their investment. There are plenty of stories of founders getting themselves ousted by investors after giving up too much control.
answered yesterday
Hart COHart CO
33.7k57995
19
Shark Tank seasons 1 through present summed up in 3 paragraphs. Brilliant, have my +1.
– MonkeyZeus
yesterday
2
@Vlad274. If something has a value of $100, would you consider it "investing" if you bought it for $100? No - you'd just break even. If you think it has a value of $100, and you bought it for $80, then you're expecting to earn $20. Similarly, if you think 25% equity has a value of 1 million dollars, you wouldn't really want to actually pay $1 million for it - you're just breaking even. The reason investors invest is because they think the value of the company is more than 4 million, and the 25% equity is worth more than the 1 million they're paying.
– Kevin
yesterday
16
@Kevin If I bought 25% for $1M I'm giving the company a $4M valuation. I expect the future value to be significantly higher, but if current value isn't $4M then one party got a better deal than the other.
– Hart CO
yesterday
28
@Kevin ...I think that is investing. I'm buying something at the rate that it is right now on the assumption/guess/knowledge that it will increase in value. That's, like, the definition of investing.
– John Doe
yesterday
6
@Kevin Generally investing involves paying the current market rate for something, with the expectation that it will go up in the future. Buying below market rate is awesome when possible, but the "go up in the future" part is generally more important. Buying something worth 100x for only 80x currency, when you don't have a strong expectation of the thing increasing in value, is actually not a very good investment unless you can easily resell it immediately.
– GrandOpener
yesterday
|
show 13 more comments
Almost nobody would just give you a pile of money with no expectation of return. In most cases you exchange equity in the company for the investment. A simple example might be that I estimate your idea/company to be worth $4M currently, so for $1M I want 25% equity. When you sell for $30M, I get 25% of the proceeds. If you go belly up, I likely don't recoup my investment, but 25% of whatever assets can be sold.
There are other arrangements, too. My investment might earn a royalty on every sale you make, without me having any equity. The investment could just be a loan that you repay with interest. There are many options and nuances; that's why lawyers are usually involved.
How much power the investor has depends on how much you give them in exchange for their investment. There are plenty of stories of founders getting themselves ousted by investors after giving up too much control.
answered yesterday
Hart COHart CO
33.7k57995
19
Shark Tank seasons 1 through present summed up in 3 paragraphs. Brilliant, have my +1.
– MonkeyZeus
yesterday
2
@Vlad274. If something has a value of $100, would you consider it "investing" if you bought it for $100? No - you'd just break even. If you think it has a value of $100, and you bought it for $80, then you're expecting to earn $20. Similarly, if you think 25% equity has a value of 1 million dollars, you wouldn't really want to actually pay $1 million for it - you're just breaking even. The reason investors invest is because they think the value of the company is more than 4 million, and the 25% equity is worth more than the 1 million they're paying.
– Kevin
yesterday
16
@Kevin If I bought 25% for $1M I'm giving the company a $4M valuation. I expect the future value to be significantly higher, but if current value isn't $4M then one party got a better deal than the other.
– Hart CO
yesterday
28
@Kevin ...I think that is investing. I'm buying something at the rate that it is right now on the assumption/guess/knowledge that it will increase in value. That's, like, the definition of investing.
– John Doe
yesterday
6
@Kevin Generally investing involves paying the current market rate for something, with the expectation that it will go up in the future. Buying below market rate is awesome when possible, but the "go up in the future" part is generally more important. Buying something worth 100x for only 80x currency, when you don't have a strong expectation of the thing increasing in value, is actually not a very good investment unless you can easily resell it immediately.
– GrandOpener
yesterday
|
show 13 more comments
Almost nobody would just give you a pile of money with no expectation of return. In most cases you exchange equity in the company for the investment. A simple example might be that I estimate your idea/company to be worth $4M currently, so for $1M I want 25% equity. When you sell for $30M, I get 25% of the proceeds. If you go belly up, I likely don't recoup my investment, but 25% of whatever assets can be sold.
There are other arrangements, too. My investment might earn a royalty on every sale you make, without me having any equity. The investment could just be a loan that you repay with interest. There are many options and nuances; that's why lawyers are usually involved.
How much power the investor has depends on how much you give them in exchange for their investment. There are plenty of stories of founders getting themselves ousted by investors after giving up too much control.
answered yesterday
Hart COHart CO
33.7k57995
Almost nobody would just give you a pile of money with no expectation of return. In most cases you exchange equity in the company for the investment. A simple example might be that I estimate your idea/company to be worth $4M currently, so for $1M I want 25% equity. When you sell for $30M, I get 25% of the proceeds. If you go belly up, I likely don't recoup my investment, but 25% of whatever assets can be sold.
There are other arrangements, too. My investment might earn a royalty on every sale you make, without me having any equity. The investment could just be a loan that you repay with interest. There are many options and nuances; that's why lawyers are usually involved.
How much power the investor has depends on how much you give them in exchange for their investment. There are plenty of stories of founders getting themselves ousted by investors after giving up too much control.
answered yesterday
Hart COHart CO
33.7k57995
edited yesterday
answered yesterday
Hart COHart CO
33.7k57995
answered yesterday
Hart COHart CO
33.7k57995
answered yesterday
Hart COHart CO
33.7k57995
33.7k57995
19
Shark Tank seasons 1 through present summed up in 3 paragraphs. Brilliant, have my +1.
– MonkeyZeus
yesterday
2
@Vlad274. If something has a value of $100, would you consider it "investing" if you bought it for $100? No - you'd just break even. If you think it has a value of $100, and you bought it for $80, then you're expecting to earn $20. Similarly, if you think 25% equity has a value of 1 million dollars, you wouldn't really want to actually pay $1 million for it - you're just breaking even. The reason investors invest is because they think the value of the company is more than 4 million, and the 25% equity is worth more than the 1 million they're paying.
– Kevin
yesterday
16
@Kevin If I bought 25% for $1M I'm giving the company a $4M valuation. I expect the future value to be significantly higher, but if current value isn't $4M then one party got a better deal than the other.
– Hart CO
yesterday
28
@Kevin ...I think that is investing. I'm buying something at the rate that it is right now on the assumption/guess/knowledge that it will increase in value. That's, like, the definition of investing.
– John Doe
yesterday
6
@Kevin Generally investing involves paying the current market rate for something, with the expectation that it will go up in the future. Buying below market rate is awesome when possible, but the "go up in the future" part is generally more important. Buying something worth 100x for only 80x currency, when you don't have a strong expectation of the thing increasing in value, is actually not a very good investment unless you can easily resell it immediately.
– GrandOpener
yesterday
|
show 13 more comments
19
Shark Tank seasons 1 through present summed up in 3 paragraphs. Brilliant, have my +1.
– MonkeyZeus
yesterday
2
@Vlad274. If something has a value of $100, would you consider it "investing" if you bought it for $100? No - you'd just break even. If you think it has a value of $100, and you bought it for $80, then you're expecting to earn $20. Similarly, if you think 25% equity has a value of 1 million dollars, you wouldn't really want to actually pay $1 million for it - you're just breaking even. The reason investors invest is because they think the value of the company is more than 4 million, and the 25% equity is worth more than the 1 million they're paying.
– Kevin
yesterday
16
@Kevin If I bought 25% for $1M I'm giving the company a $4M valuation. I expect the future value to be significantly higher, but if current value isn't $4M then one party got a better deal than the other.
– Hart CO
yesterday
28
@Kevin ...I think that is investing. I'm buying something at the rate that it is right now on the assumption/guess/knowledge that it will increase in value. That's, like, the definition of investing.
– John Doe
yesterday
6
@Kevin Generally investing involves paying the current market rate for something, with the expectation that it will go up in the future. Buying below market rate is awesome when possible, but the "go up in the future" part is generally more important. Buying something worth 100x for only 80x currency, when you don't have a strong expectation of the thing increasing in value, is actually not a very good investment unless you can easily resell it immediately.
– GrandOpener
yesterday
19
19
Shark Tank seasons 1 through present summed up in 3 paragraphs. Brilliant, have my +1.
– MonkeyZeus
yesterday
Shark Tank seasons 1 through present summed up in 3 paragraphs. Brilliant, have my +1.
– MonkeyZeus
yesterday
2
2
@Vlad274. If something has a value of $100, would you consider it "investing" if you bought it for $100? No - you'd just break even. If you think it has a value of $100, and you bought it for $80, then you're expecting to earn $20. Similarly, if you think 25% equity has a value of 1 million dollars, you wouldn't really want to actually pay $1 million for it - you're just breaking even. The reason investors invest is because they think the value of the company is more than 4 million, and the 25% equity is worth more than the 1 million they're paying.
– Kevin
yesterday
@Vlad274. If something has a value of $100, would you consider it "investing" if you bought it for $100? No - you'd just break even. If you think it has a value of $100, and you bought it for $80, then you're expecting to earn $20. Similarly, if you think 25% equity has a value of 1 million dollars, you wouldn't really want to actually pay $1 million for it - you're just breaking even. The reason investors invest is because they think the value of the company is more than 4 million, and the 25% equity is worth more than the 1 million they're paying.
– Kevin
yesterday
16
16
@Kevin If I bought 25% for $1M I'm giving the company a $4M valuation. I expect the future value to be significantly higher, but if current value isn't $4M then one party got a better deal than the other.
– Hart CO
yesterday
@Kevin If I bought 25% for $1M I'm giving the company a $4M valuation. I expect the future value to be significantly higher, but if current value isn't $4M then one party got a better deal than the other.
– Hart CO
yesterday
28
28
@Kevin ...I think that is investing. I'm buying something at the rate that it is right now on the assumption/guess/knowledge that it will increase in value. That's, like, the definition of investing.
– John Doe
yesterday
@Kevin ...I think that is investing. I'm buying something at the rate that it is right now on the assumption/guess/knowledge that it will increase in value. That's, like, the definition of investing.
– John Doe
yesterday
6
6
@Kevin Generally investing involves paying the current market rate for something, with the expectation that it will go up in the future. Buying below market rate is awesome when possible, but the "go up in the future" part is generally more important. Buying something worth 100x for only 80x currency, when you don't have a strong expectation of the thing increasing in value, is actually not a very good investment unless you can easily resell it immediately.
– GrandOpener
yesterday
@Kevin Generally investing involves paying the current market rate for something, with the expectation that it will go up in the future. Buying below market rate is awesome when possible, but the "go up in the future" part is generally more important. Buying something worth 100x for only 80x currency, when you don't have a strong expectation of the thing increasing in value, is actually not a very good investment unless you can easily resell it immediately.
– GrandOpener
yesterday
|
show 13 more comments
Typically, if you create a business that wants investors, you will issue stock in the company. One unit of stock is called a share. You decide how many shares there will be and how much each share is worth. The total value of all the shares represents the market value of your business.
Say you issue 1 million shares in your company, and you value each share at $4. That makes the market value of your company $4 million. If someone comes along and wants to invest $1 million in your company, it's a simple matter of selling them 250,000 shares.
At some point in the future, your company is doing really well and someone offers you $30 million for it. There are 1 million shares, so that means each share is now worth $30. Your investor owns 250,000 shares, so their $1 million investment is now worth $7.5 million. You still own the other 750,000 shares, so you get the other $22.5 million.
That's a really simple example, but it illustrates the basic idea of investing in stock of a company.
answered 21 hours ago
MohairMohair
23813
Note that it's not a simple matter of selling 250k shares of 1M. If you are selling shares, then the shares have to come from somewhere. Either they are being sold by someone who already owns them, which results in the money not actually going to the company, or the company creates/sells shares that are not owned by anyone other than the company (this latter is the usual intent for raising capital). Doing the latter dilutes the ownership share represented by the current outstanding shares. This can be that new shares are created, resulting in 333,333 new shares, for 1,333,333 shares total.
– Makyen
19 hours ago
Alternately, the shares could already exist, or be authorized, but be owned by the company/not issued. In which case, only 750,000 shares are owned by others. However, their effective ownership percentage is reduced when the additional shares are sold by the company. In other words, in that scenario 750k shares represented 100% ownership of the company, but once the additional 250k shares are sold, the 750k shares represent 75% ownership.
– Makyen
19 hours ago
Doesn't the investment dilute ownership in (theoretically) exact proportion to how much money the investor invests? Per the comments on the other answer - investor pays $1 million for 25% of a company now valued at $4m. The company just got $1m cash on the books, so, more or less they were worth $3m before the investment. They might have a smaller share but it's of a pie that's exactly embiggened enough that they break even. In fact the newly capitalized company could potentially be worth more than it was before (like, maybe it was only worth $2m) because now it can sieze opportunity!
– stannius
19 hours ago
@Makyen In my simple example, yes, it is that simple. There is one owner of the company who owns all 1 million shares. He sells 25% of his shares to someone else. True, the proceeds of that sale go to the person who owns them, not the company, but in my example, the owner is effectively the company, so they are one and the same.
– Mohair
7 hours ago
@Mohair The company and owners of the stock are definitely not one and the same. One major point of having a corporation is to establish a separate legal entity from the person or persons who own the stock. Sometimes, that's the entire point of the corporation (obviously, if you're seeking investment, it's not the entire point for this company). However, strictly maintaining that legal separation is critical. While someone might be willing to purchase stock that's privately held, that's not what's normally considered investing in the company. It's generally considered investing in the stock.
– Makyen
5 hours ago
|
show 1 more comment
Typically, if you create a business that wants investors, you will issue stock in the company. One unit of stock is called a share. You decide how many shares there will be and how much each share is worth. The total value of all the shares represents the market value of your business.
Say you issue 1 million shares in your company, and you value each share at $4. That makes the market value of your company $4 million. If someone comes along and wants to invest $1 million in your company, it's a simple matter of selling them 250,000 shares.
At some point in the future, your company is doing really well and someone offers you $30 million for it. There are 1 million shares, so that means each share is now worth $30. Your investor owns 250,000 shares, so their $1 million investment is now worth $7.5 million. You still own the other 750,000 shares, so you get the other $22.5 million.
That's a really simple example, but it illustrates the basic idea of investing in stock of a company.
answered 21 hours ago
MohairMohair
23813
Note that it's not a simple matter of selling 250k shares of 1M. If you are selling shares, then the shares have to come from somewhere. Either they are being sold by someone who already owns them, which results in the money not actually going to the company, or the company creates/sells shares that are not owned by anyone other than the company (this latter is the usual intent for raising capital). Doing the latter dilutes the ownership share represented by the current outstanding shares. This can be that new shares are created, resulting in 333,333 new shares, for 1,333,333 shares total.
– Makyen
19 hours ago
Alternately, the shares could already exist, or be authorized, but be owned by the company/not issued. In which case, only 750,000 shares are owned by others. However, their effective ownership percentage is reduced when the additional shares are sold by the company. In other words, in that scenario 750k shares represented 100% ownership of the company, but once the additional 250k shares are sold, the 750k shares represent 75% ownership.
– Makyen
19 hours ago
Doesn't the investment dilute ownership in (theoretically) exact proportion to how much money the investor invests? Per the comments on the other answer - investor pays $1 million for 25% of a company now valued at $4m. The company just got $1m cash on the books, so, more or less they were worth $3m before the investment. They might have a smaller share but it's of a pie that's exactly embiggened enough that they break even. In fact the newly capitalized company could potentially be worth more than it was before (like, maybe it was only worth $2m) because now it can sieze opportunity!
– stannius
19 hours ago
@Makyen In my simple example, yes, it is that simple. There is one owner of the company who owns all 1 million shares. He sells 25% of his shares to someone else. True, the proceeds of that sale go to the person who owns them, not the company, but in my example, the owner is effectively the company, so they are one and the same.
– Mohair
7 hours ago
@Mohair The company and owners of the stock are definitely not one and the same. One major point of having a corporation is to establish a separate legal entity from the person or persons who own the stock. Sometimes, that's the entire point of the corporation (obviously, if you're seeking investment, it's not the entire point for this company). However, strictly maintaining that legal separation is critical. While someone might be willing to purchase stock that's privately held, that's not what's normally considered investing in the company. It's generally considered investing in the stock.
– Makyen
5 hours ago
|
show 1 more comment
Typically, if you create a business that wants investors, you will issue stock in the company. One unit of stock is called a share. You decide how many shares there will be and how much each share is worth. The total value of all the shares represents the market value of your business.
Say you issue 1 million shares in your company, and you value each share at $4. That makes the market value of your company $4 million. If someone comes along and wants to invest $1 million in your company, it's a simple matter of selling them 250,000 shares.
At some point in the future, your company is doing really well and someone offers you $30 million for it. There are 1 million shares, so that means each share is now worth $30. Your investor owns 250,000 shares, so their $1 million investment is now worth $7.5 million. You still own the other 750,000 shares, so you get the other $22.5 million.
That's a really simple example, but it illustrates the basic idea of investing in stock of a company.
answered 21 hours ago
MohairMohair
23813
Typically, if you create a business that wants investors, you will issue stock in the company. One unit of stock is called a share. You decide how many shares there will be and how much each share is worth. The total value of all the shares represents the market value of your business.
Say you issue 1 million shares in your company, and you value each share at $4. That makes the market value of your company $4 million. If someone comes along and wants to invest $1 million in your company, it's a simple matter of selling them 250,000 shares.
At some point in the future, your company is doing really well and someone offers you $30 million for it. There are 1 million shares, so that means each share is now worth $30. Your investor owns 250,000 shares, so their $1 million investment is now worth $7.5 million. You still own the other 750,000 shares, so you get the other $22.5 million.
That's a really simple example, but it illustrates the basic idea of investing in stock of a company.
answered 21 hours ago
MohairMohair
23813
answered 21 hours ago
MohairMohair
23813
answered 21 hours ago
MohairMohair
23813
answered 21 hours ago
MohairMohair
23813
23813
Note that it's not a simple matter of selling 250k shares of 1M. If you are selling shares, then the shares have to come from somewhere. Either they are being sold by someone who already owns them, which results in the money not actually going to the company, or the company creates/sells shares that are not owned by anyone other than the company (this latter is the usual intent for raising capital). Doing the latter dilutes the ownership share represented by the current outstanding shares. This can be that new shares are created, resulting in 333,333 new shares, for 1,333,333 shares total.
– Makyen
19 hours ago
Alternately, the shares could already exist, or be authorized, but be owned by the company/not issued. In which case, only 750,000 shares are owned by others. However, their effective ownership percentage is reduced when the additional shares are sold by the company. In other words, in that scenario 750k shares represented 100% ownership of the company, but once the additional 250k shares are sold, the 750k shares represent 75% ownership.
– Makyen
19 hours ago
Doesn't the investment dilute ownership in (theoretically) exact proportion to how much money the investor invests? Per the comments on the other answer - investor pays $1 million for 25% of a company now valued at $4m. The company just got $1m cash on the books, so, more or less they were worth $3m before the investment. They might have a smaller share but it's of a pie that's exactly embiggened enough that they break even. In fact the newly capitalized company could potentially be worth more than it was before (like, maybe it was only worth $2m) because now it can sieze opportunity!
– stannius
19 hours ago
@Makyen In my simple example, yes, it is that simple. There is one owner of the company who owns all 1 million shares. He sells 25% of his shares to someone else. True, the proceeds of that sale go to the person who owns them, not the company, but in my example, the owner is effectively the company, so they are one and the same.
– Mohair
7 hours ago
@Mohair The company and owners of the stock are definitely not one and the same. One major point of having a corporation is to establish a separate legal entity from the person or persons who own the stock. Sometimes, that's the entire point of the corporation (obviously, if you're seeking investment, it's not the entire point for this company). However, strictly maintaining that legal separation is critical. While someone might be willing to purchase stock that's privately held, that's not what's normally considered investing in the company. It's generally considered investing in the stock.
– Makyen
5 hours ago
|
show 1 more comment
Note that it's not a simple matter of selling 250k shares of 1M. If you are selling shares, then the shares have to come from somewhere. Either they are being sold by someone who already owns them, which results in the money not actually going to the company, or the company creates/sells shares that are not owned by anyone other than the company (this latter is the usual intent for raising capital). Doing the latter dilutes the ownership share represented by the current outstanding shares. This can be that new shares are created, resulting in 333,333 new shares, for 1,333,333 shares total.
– Makyen
19 hours ago
Alternately, the shares could already exist, or be authorized, but be owned by the company/not issued. In which case, only 750,000 shares are owned by others. However, their effective ownership percentage is reduced when the additional shares are sold by the company. In other words, in that scenario 750k shares represented 100% ownership of the company, but once the additional 250k shares are sold, the 750k shares represent 75% ownership.
– Makyen
19 hours ago
Doesn't the investment dilute ownership in (theoretically) exact proportion to how much money the investor invests? Per the comments on the other answer - investor pays $1 million for 25% of a company now valued at $4m. The company just got $1m cash on the books, so, more or less they were worth $3m before the investment. They might have a smaller share but it's of a pie that's exactly embiggened enough that they break even. In fact the newly capitalized company could potentially be worth more than it was before (like, maybe it was only worth $2m) because now it can sieze opportunity!
– stannius
19 hours ago
@Makyen In my simple example, yes, it is that simple. There is one owner of the company who owns all 1 million shares. He sells 25% of his shares to someone else. True, the proceeds of that sale go to the person who owns them, not the company, but in my example, the owner is effectively the company, so they are one and the same.
– Mohair
7 hours ago
@Mohair The company and owners of the stock are definitely not one and the same. One major point of having a corporation is to establish a separate legal entity from the person or persons who own the stock. Sometimes, that's the entire point of the corporation (obviously, if you're seeking investment, it's not the entire point for this company). However, strictly maintaining that legal separation is critical. While someone might be willing to purchase stock that's privately held, that's not what's normally considered investing in the company. It's generally considered investing in the stock.
– Makyen
5 hours ago
Note that it's not a simple matter of selling 250k shares of 1M. If you are selling shares, then the shares have to come from somewhere. Either they are being sold by someone who already owns them, which results in the money not actually going to the company, or the company creates/sells shares that are not owned by anyone other than the company (this latter is the usual intent for raising capital). Doing the latter dilutes the ownership share represented by the current outstanding shares. This can be that new shares are created, resulting in 333,333 new shares, for 1,333,333 shares total.
– Makyen
19 hours ago
Note that it's not a simple matter of selling 250k shares of 1M. If you are selling shares, then the shares have to come from somewhere. Either they are being sold by someone who already owns them, which results in the money not actually going to the company, or the company creates/sells shares that are not owned by anyone other than the company (this latter is the usual intent for raising capital). Doing the latter dilutes the ownership share represented by the current outstanding shares. This can be that new shares are created, resulting in 333,333 new shares, for 1,333,333 shares total.
– Makyen
19 hours ago
Alternately, the shares could already exist, or be authorized, but be owned by the company/not issued. In which case, only 750,000 shares are owned by others. However, their effective ownership percentage is reduced when the additional shares are sold by the company. In other words, in that scenario 750k shares represented 100% ownership of the company, but once the additional 250k shares are sold, the 750k shares represent 75% ownership.
– Makyen
19 hours ago
Alternately, the shares could already exist, or be authorized, but be owned by the company/not issued. In which case, only 750,000 shares are owned by others. However, their effective ownership percentage is reduced when the additional shares are sold by the company. In other words, in that scenario 750k shares represented 100% ownership of the company, but once the additional 250k shares are sold, the 750k shares represent 75% ownership.
– Makyen
19 hours ago
Doesn't the investment dilute ownership in (theoretically) exact proportion to how much money the investor invests? Per the comments on the other answer - investor pays $1 million for 25% of a company now valued at $4m. The company just got $1m cash on the books, so, more or less they were worth $3m before the investment. They might have a smaller share but it's of a pie that's exactly embiggened enough that they break even. In fact the newly capitalized company could potentially be worth more than it was before (like, maybe it was only worth $2m) because now it can sieze opportunity!
– stannius
19 hours ago
Doesn't the investment dilute ownership in (theoretically) exact proportion to how much money the investor invests? Per the comments on the other answer - investor pays $1 million for 25% of a company now valued at $4m. The company just got $1m cash on the books, so, more or less they were worth $3m before the investment. They might have a smaller share but it's of a pie that's exactly embiggened enough that they break even. In fact the newly capitalized company could potentially be worth more than it was before (like, maybe it was only worth $2m) because now it can sieze opportunity!
– stannius
19 hours ago
@Makyen In my simple example, yes, it is that simple. There is one owner of the company who owns all 1 million shares. He sells 25% of his shares to someone else. True, the proceeds of that sale go to the person who owns them, not the company, but in my example, the owner is effectively the company, so they are one and the same.
– Mohair
7 hours ago
@Makyen In my simple example, yes, it is that simple. There is one owner of the company who owns all 1 million shares. He sells 25% of his shares to someone else. True, the proceeds of that sale go to the person who owns them, not the company, but in my example, the owner is effectively the company, so they are one and the same.
– Mohair
7 hours ago
@Mohair The company and owners of the stock are definitely not one and the same. One major point of having a corporation is to establish a separate legal entity from the person or persons who own the stock. Sometimes, that's the entire point of the corporation (obviously, if you're seeking investment, it's not the entire point for this company). However, strictly maintaining that legal separation is critical. While someone might be willing to purchase stock that's privately held, that's not what's normally considered investing in the company. It's generally considered investing in the stock.
– Makyen
5 hours ago
@Mohair The company and owners of the stock are definitely not one and the same. One major point of having a corporation is to establish a separate legal entity from the person or persons who own the stock. Sometimes, that's the entire point of the corporation (obviously, if you're seeking investment, it's not the entire point for this company). However, strictly maintaining that legal separation is critical. While someone might be willing to purchase stock that's privately held, that's not what's normally considered investing in the company. It's generally considered investing in the stock.
– Makyen
5 hours ago
|
show 1 more comment
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3
See en.wikipedia.org/wiki/Seed_money and en.wikipedia.org/wiki/Venture_capital.
– ceejayoz
yesterday
2
Have you ever watched Shark Tank? It's over-simplified, but you do see how the investors "value" companies and ask for equity or royalties in exchange for their investment. Edit: Shark Tank is a US show, but there are similar shows in other countries.
– JPhi1618
yesterday
You're asking whether accepting investment means you're necessarily selling them a (large) portion of equity, not just a fractional revenue-share. Generally, yes. Even with angel investors.
– smci
19 hours ago
2
Is this on-topic?
– stannius
19 hours ago