My (possibly incorrect/incomplete) understanding is that if a pre-IPO company needs $1000, they can issue 100 shares for $10 each. If people outside the company actually buy all 100 shares at that price (which I think almost always happens), then the company gets the needed $1000. Thereafter, if the stock price becomes $15 or $2, how does it matter to the company? They’ve already received the $1000 they needed, right? Any subsequent trading isn’t actually generating money to run the company, right?
In: 8
*In the U.S.
The shares that are sold are literal ownership shares of the company. Depending on how the share offerings are structured, it is possible for the owners of those 100 shares to be the outright owners of the company. They own and control the company. The C-level executives are their employees. If the shareholders don’t like where the company is going, they can fire the people holding those positions. Usually C-level executives will also own shares, so they have a vested interest in the share prices doing well.
You are correct that subsequent trades on the open market don’t generate extra income for the company. But that doesn’t mean that the share price is no longer of concern to the company. Lets say the company grows well and finds itself needing $100,000 the next year to support increased expansion to take hold of opportunities. The company can spin out more shares for sale. The current market value of the company’s shares impact how many shares the company will need to create to generate the revenue. It also increases the likelihood that an investor will buy those shares. If the share prices tanked and the company did nothing to address the issue investors are going to be reluctant to buy the shares and risk the same thing happening to them.
Latest Answers