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
A couple ways:
1. Founders typically pay themselves a salary once there’s enough money in the company to do so, but until there’s external funding this would be largely pointless, as the founder would be paying themselves out of their own pocket.
2. It’s common, especially in later funding rounds where there’s competition among investors, for founders and early investors to cash out some of their own shares as part of the transaction. It’s generally a fraction of the total investment, but it’s tolerated as table stakes for the opportunity to invest in a growing company.
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