I don't know shit about business, but I was just thinking about something.
Let's say person A has a business that is doing well, but needs capital to grow so he asks for an investment of 50k from person B for 20%. Now, since B knows that A is not going to keep the money, but invest it right back into the company, doesn't that imply that (regardless of company growth) he pretty much only gave A 40k because he now owns 20% of the company, including that extra 50k that the now have?
bump?
>>1272856
B doesn't give A any money directly. He gives A's business money in exchange for 20% of its ownership.
Because B has invested into the company he is entitled to 20% of future dividends/wealth generated by the business.
This is a sacrifice A must deal with if he wants to raise capital by selling equity in his business. Alternatively, if A doesn't like this proposal they can raise funds from alternative sources like a bank loan and pay interest instead.
>doesn't that imply that (regardless of company growth) he pretty much only gave A 40k because he now owns 20% of the company, including that extra 50k that the now have?
He gave the business 50k in exchange for a 20% stake in the business. A doesn't directly receive a penny here. He may only receive money when the business is liquidated and this depends on the total wealth of the business. E.g:
before B invests:
business=100k
100% owned by A
A gets 100k assuming everything is sold at value, etc..
after B invests:
business=100k+50k=150k
80% owned by A, 20% owned by B
A gets 150k*80%=120k and B gets 150k*20%=30k
>>1272952
Yes, I understand what investing is and I also understand that A can't just get his liquidate his investment right away, but I just meant it in a pure theoretical value sense.
So you're basically saying I'm right about the investor getting more value than it looks like.
>>1272956
(assuming obviously that the money is invested back into the company)
>>1272956
Yes but it depends on what the company is valued at and how much B pays for the 20% ownership.
If B pays the fair value of the company there shouldn't be any "value gained". If B pays less than what the 20% is worth then he will gain wealth. If B pays more than what the 20% is worth he will lose wealth.