I’ve been watching old episodes of shark tank/dragons den. I know that: ludicrous amount of money for <10% = laughable deal, but I don’t know what it means to have a percentage in the company. My understanding is it’s how much of a say you have in the company? Not even sure that’s right.
In: Economics
If you own 10% of a company your own 10% of it’s assets and 10% of any profit or losses it makes.
eg you buy 12.5% of a pizza company, then you own 12.5% of the building, ovens, ingredients etc. And 1 slice of every pizza that goes out the door belongs to you as well (8 slice pizza) so you make 1 slice of pizza’s profit every time they sell a whole pizza.
It’s partly how much say you have, yes. “control” is the word I’d use. But more importantly it is the amount of proceeds you are entitled to. For instance, If the company is sold and you own 10% of the company, you get 10% of the price of the sale. (broadly speaking, someone that knows more about business might find nuances with that explanation)
you don’t necessarily have much say. But lets says the company grows and gets sold, you get you 10% of the money. Or if you want to sell you part. Really not much different than buying a stock in say Apple except one stock in Apple is about 0.000000006% of Apple
The answer to this is complicated because it depends on the exact agreement the investor has with the company.
However, the most straightforward answer is that if you own 10% of the company, then you are entitled to 10% of the value of the company. Usually what that means is that if the company becomes profitable later on, or the company goes public, meaning the shares in the company are offered to the public, the person who owns 10% of the company is entitled to 10% of the profits, or can choose to sell their stake in the company for whatever the public offering price is later on.
There are two main reasons you might want to invest in a company.
Reason one is that the company appears to be profitable, and even more profitable than it was in the past, and that people expect it will return those profits to shareholders as dividends. This is the traditional reason people invested in businesses in general. The business makes a profit, some or all of that profit is returned to the owners, and the owners therefore benefit from owning part of the business.
Reason two is fundamentally that you think somebody else will be willing to pay even more for an ownership stake in the company down the line. Don’t think about why they would want to do that too much, because if you start thinking about fundamentals, you miss out on profits. Plenty of people have made money by investing in fundamentally unprofitable businesses like Uber. A lot of the history of recent stock offerings is literally that people assume that expansion and/or market share will allow the business to eventually become profitable, at which point it might choose to start doing things like issuing dividends. The stock only has value because people expect that in the future it will have value. Whether or not that is true, if you’re buying into a business relatively early in its history, you’re effectively gambling that at some point in the future you will be able to unload your shares for much more than you paid for them on to somebody else who thinks they, too, might be able to unload their shares. It doesn’t actually necessarily matter to you whether the business succeeds in the long run, it only matters to you whether you think it will be more valuable later on than it is right now.
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TL;Dr: Owning 10% of the company in theory means you are entitled to 10% of the value of its assets and future income, and you probably also have 10% of the vote in any major decisions made later on. But much of the value of new companies has nothing to do with how much money they’ll actually make in the near future. Instead, it has to do with what people think it might make in the much more distant future.
Generally, it’s ownership, which is both financial and “how much say you have.” Say three people own a company, even split 33% (ish) apiece.
Let’s say that this year that company made $300,000 in profit, after all expenses – pure profit here. We’d split that profit evenly – $100,000 to each of us.
Now let’s say we had an important decision to make – let’s buy another company and try to double our business. If we chose to vote on it, each of us has an equal vote, and the majority would make the choice.
10% owned by a shark would work the same way. Any future profits the company made, they’d be entitled to 10%. If the company was ever sold, they’d take 10% of the proceeds. If anything important ever came to a vote, their vote would count for 10% of the total. It’s why it’s very common for people to own 51% of a business – if you own 51% and anything ever gets voted on, your vote always wins. Nobody else can make a decision without your approval.
So this is a very nuanced topic, but essentially companies themselves have value apart from their profits, losses, assets, and debts. Those components are an important *part* of their value, but they aren’t everything. For example, a startup company might have no profits, losses, assets, or debts, but you think the founders might be able to build something which has those things in the future.
Owning a company usually means you have some control over it, and always means that you’re entitled to some percentage of the proceeds if control of the company is ever sold to some other entity.
For example, maybe you invest $1000 in an early stage company because you think that the founders have a really smart idea, and you end up with 10% of the company. This implies you think the whole company is worth right around $10,000. Now let’s say they go off and do smart things and then in five years they’re bought by Google. Google decides the company is worth about $5 million and so they allocate that much in terms of stock in GOOG to the people who control the company, including you. Since you control 10% of the company, you get $500,000. Not a bad return for $1000 over five years!
Doing the math in reverse… Since you valued the company at $10,000 at that initial investment, you were saying that there was at least an 0.2% chance that someone would eventually buy the company for $5M. Obviously, the math isn’t quite like that; in reality there’s a whole distribution of outcomes (down to and including $0), but this is essentially the idea. Higher valuation = higher expectation of greater success. The percentage of stake and seed capital is just a proxy to the valuation.
Of course, it almost never happens that way. Companies take additional investment over time, so your 10% maybe becomes 8% at some point, then 5%, then 4%, etc. You also might have the opportunity to sell your stake when the company takes on another investor, if you have decided you’ve had enough. Also most companies fail, so your $1000 is *probably* turning into $0.
Once a company gets big enough and stable enough that their future value is no longer growing at a significant rate (e.g. a company like Comcast), they often start offering a small amount of cash once per quarter to the ownership, in proportion to the percentage of the company they own (determined by shares). This in and of itself means the ownership has some intrinsic value, since you can buy a stake in the company and hold onto it for the dividend and sell it later and make a profit just by doing that. This doesn’t apply to startups though.
It literally means how much of the company you own.
This is dumbed down but if you own 10% of the shares you’re entitled to 10% of the profit and own 10% of all the companies assets.
It’s also not always ‘laughable.’ I’m sure you would be ecstatic to own 10% of Apple.
10% isn’t necessarily laughable. It all depends on what kind of say the investor expects to have in the company and how much the investor thinks the company is worth.
**Generally** speaking, the percentage investment means that the person (or company) will own the rights to that percent of a company’s dividends, if any are ever distributed. Dividends are payments the company pays out to its shareholders, hopefully out of the profits it has made. The investor may also be thinking that if the company does well and grows, they will be Abel to sell their stake for more money than they paid for it. Investors may also be interested in holding more than 50% of the shares because, at that point, they’d be the majority shareholders and could control the direction of the company.
The reason the small percentages are often dismissed as laughable on shows like Shark Tank comes down to the **valuation** of the company. If I want a $250,000 investment and I offer 10% of the company, that implies that the total market value of the company is $2.5 million. It also means you won’t have enough shares to control the company, if you don’t like how it’s being managed. Now that’s fine and dandy if my company is Google. $250,000 for 10% of Google would be the deal of a lifetime, even without control!
But most companies going onto Shark Tank aren’t the next Google. Most of them are people with not much management experience and an idea for a small gadget or service that will only ever make a small amount of money and, truth be told, will very likely fail. Well, maybe that business isn’t really worth $2.5 million in total — and if so, then a smart investor is not going to give you 10% of that amount ($250,000) for 10% of the company. They’re either going to demand a much higher stake of the company for that amount of money, or they’re going to offer you less money.
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