Let’s say Jane creates a company and owns 100% of it. Jane then decides to give John 25% of the company in exchange for $100,000. Does this $100,000 go into the bank account of the *company* ? Or does it go to Jane, the *individual*, for giving up a portion of her company?
On shows like Shark Tank, the sharks frequently ask the contestants what they plan to do with the shark’s money if they invest, implying that the money will go into the bank account of the *company*. If that is the case, how does Jane, the *individual* who worked hard to create the company, get compensated for the portion of the company she used to own that has been transfered to this new investor?
In: Economics
The short answer is she doesnt get compensated for that. Her compensation is that her company can keep operating because someone else out money in. In your scenario, there’s maybe 3 ways Jane gets paid:
1. In addition to her equity, if she’s actively running the company as CEO or something equivalent, she probably receives a salary + bonus structure for that.
2. If cash dividends are paid to equity holders, Jane will receive whatever her portion is based on her % of ownership.
3. If the company ever becomes large or profitable enough to sell, Jane will receive some of the purchase price based on the amount of the company she still owns.
The problem you’re pointing out is a tough one for many founders. When a new company is started, it’s often losing money but is considered too risky for a bank loan. The founder has to sell some piece of the ownership to get funds in to keep running the business. However, it reduces their eventual payday if the company ever is able to sell. So the founder will want the most money while giving away the least amount of ownership. An investor like John of course wants the opposite, more ownership for less money. That’s why in Shark Tank they haggle over ownership as well as cash invested.
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