5 ms·

This is something that has bugged me too.. Company A has 4 founders, each with 25% share and are doing well and valued at say 4m Scenario 1 An investor wants

This is something that has bugged me too.. Company A has 4 founders, each with 25% share and are doing well and valued at say 4m Scenario 1 An investor wants to enter the game and buys out one founder for 1m No change in company's value of 4m and they go on to the sunset Scenario 2 An investor wants to enter the game and joins the other 4 founders with 1m cash New equity split is now 20% each and company has 1m cash in the bank, valuing them at 5m with each having a 20% stake Any exit from this position should allow the assets to be paid out equally to the 5 shareholders if it is ok for one stakeholder to negotiate to be paid out first a preagreed sum, then it should also be okay for other stakeholders to negitiate to take money off the table during funding. I don't understand this return money to investors bit. Shouldn't it be share the money equally among all stakeholders.

harryh 11y ago
Here is where the mistake in your thinking is. In scenario 2 the investor will only agree to put in 1M for a 20% stake if he gets preferred shares. If he only gets common shares he might only put in, say, 500k for 20%. Assuming that you think the company is going to increase in value, the fact that he has preferred shares won't matter in an exit so you're much better off taking 1M instead of 500k (assuming you can put the extra money to good use). And if you don't think that the company is going to increase in value then why did you start it in the first place?