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
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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