general investment question

bump?

>>1272856

B doesn't give A any money directly. He gives A's business money in exchange for 20% of its ownership.

Because B has invested into the company he is entitled to 20% of future dividends/wealth generated by the business.

This is a sacrifice A must deal with if he wants to raise capital by selling equity in his business. Alternatively, if A doesn't like this proposal they can raise funds from alternative sources like a bank loan and pay interest instead.

>doesn't that imply that (regardless of company growth) he pretty much only gave A 40k because he now owns 20% of the company, including that extra 50k that the now have?

He gave the business 50k in exchange for a 20% stake in the business. A doesn't directly receive a penny here. He may only receive money when the business is liquidated and this depends on the total wealth of the business. E.g:

before B invests:
business=100k
100% owned by A
A gets 100k assuming everything is sold at value, etc..

after B invests:
business=100k+50k=150k
80% owned by A, 20% owned by B
A gets 150k*80%=120k and B gets 150k*20%=30k

>>1272952
Yes, I understand what investing is and I also understand that A can't just get his liquidate his investment right away, but I just meant it in a pure theoretical value sense.

So you're basically saying I'm right about the investor getting more value than it looks like.

>>1272956
(assuming obviously that the money is invested back into the company)

>>1272956
B*

>>1272956

Yes but it depends on what the company is valued at and how much B pays for the 20% ownership.

If B pays the fair value of the company there shouldn't be any "value gained". If B pays less than what the 20% is worth then he will gain wealth. If B pays more than what the 20% is worth he will lose wealth.