So let’s take any bezos for example. He owns something like 55 million shares of amazon which amounts to about 14% of the company.
A random joe owns 10k shares of his company which amounts to 70% of his company.
So why is there a difference? How do companies decide and increase their number of shares?
Can companies just decide to add more shares or is their a process that follows?
I’m sorry if I’ve completely gotten everything wrong here I’m very young And trying to gather some financial knowledge. Thanks.
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The number of shares is meaningless. Only the value of the company divided by the number of shares is meaningful. They can make as many or as few shares as they want–it doesn’t matter. As further evidence of the number of shares being meaningless, companies will often split or, less-commonly, a reverse split stocks. In a split, each share holder is given a multiple of the share they hold–a 5 to 1 split means you get 5 shares for everyone you currently own. A reverse split is just the opposite–a 1 for 5 reverse split means your previous 5 shares are reduced to a single share. In either case, the value of the company doesn’t change. In our split example the company worth $100 per share is worth $20 per share after the split. In the reverse split the company worth $20 per share is now worth $100 per share.
When starting out they can have as many shares as they want, but if you start a company with 5 people, you wouldn’t want them all to have just 1 share. It makes growing the company and adding shares a pain. Investors in the future will want shares, but more importantly you’ll probably end up giving some shares to your employees. The employees are like getting a quantity of shares an order of magnitude (or three) less than the founders.
You’ll usually pick a large number to make a bunch of different ownership percentages possible, while also not choosing a ridiculous number like 500 octillion shares. I work at a relatively early stage startup and they’ve given me options to purchase a few hundred thousand shares. It may sound like a lot, but the current valuation is much less than a dollar a share and they are essentially worthless unless our company is acquired or IPOs (called an exit). Only about 7% of early stage start ups achieve an exit.
When people create a company, they have to declare how much thing (generally money, but it may be other things) they want to give to it. For instance, let’s say we create a company, and we agree to put $10k each. So, the company’s capital/equity will be equal to $20k.
Now, we have to create shares that will represent those $20k. How many shares? As many as we want, it doesn’t matter. We could print two shares of $10k each, 2000 shares of $10 each, or (generally) 20 thousand shares of $1 each.
With the years, as our company grows, several things may happen. For instance, we may want to invite other people by selling them new shares either private or publicly, or we may find that our company is so valuable than our shares are worth so much that it makes sense to divide them into new shares. Either way, our company now is represented by more and more shares.
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