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
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.
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