If you have ever watched the Dragon's Den or similar shows, basically people go and ask for $100,000 for 20% of their company. What I would like to know is how does this works. Who owns the $100,000 and is there any rules around them? For example, can I pocket it or use it to buy another person out who lets say somebody who owns only 10%. Can I give them 10,000 and take their 10% should they agree to it. I never really understood how this worked and I'm curios as to some general guidelines.
closed as too broad by gnat, DarkCygnus, Dukeling, HorusKol, Twyxz Oct 5 '18 at 6:12
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There's a piece that's missing (but implied) by the offer.
When someone buys "20% of the company", they're not buying something from nobody - they're buying it from someone selling "20% of the company" - such as the founder. The money does not belong to the company (though it's often given to the company.)
Short Story: The money belongs to whoever sold the shares.
Let me walk you through two simple examples:
Someone is offering to sell 100% of their company for $X. It's pretty obvious that the money doesn't belong to the company - it's not like the money goes right back to the person who was paying. It goes into the previous owner's pocket.
Someone is starting a company up. They offer "anyone want to buy 10% of the company for $X?" - they're offering a slice of the ownership of the company in exchange for personal money.
... which they turn around and invest in their business. After all, they still own 90% of it, and have a huge interest in seeing it succeed. Ideally, they wouldn't have even given up the 10% that they did... but they needed capital to help build/expand their business. So as a sort of compromise to get that money to do that, they offer to let someone else get a portion of their company.
If that investment money expands their profits, it gives the majority owner far more money in return than if they simply pocketed the investment, and it gives the investor more return than what they put down to begin with.