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From a business fundamentals perspective, the two scenarios are completely different. In the second scenario, the investor turned employee has invested $100k ca

From a business fundamentals perspective, the two scenarios are completely different. In the second scenario, the investor turned employee has invested $100k cash. This is an actual liquid asset that does not exist in the first scenario.

FullyFunctional 6y ago
I don't see why it's not the same (Company gives $200k, issues shares, gets back $100k). 2nd point: GP said "invest 100k/year", thus he do make additional investments.
- gamblor956 6y ago
  Because a liquid asset is different from a liability. And the transactions have different tax, legal, and accounting outcomes. At the simplest level, you can buy things and services with the $100k cash in Scenario 2 at the start of the year as soon as the investment is made. You don't have that cash in Scenario 1.
jdxcode 6y ago
Business fundamentals are concerned with cash flow (which the investment does not change because it’s not part of income/expenses). You’re talking about the balance statement, which it would benefit but unrelated to profit. In other words, yes they have more money, but no, it does not make them more profitable.
- gamblor956 6y ago
  Business fundamentals are concerned with cash flow and the balance sheet. It's irrelevant to have positive cash flow if it can't service your debts (see, e.g., almost every company destroyed by a private equity firm, for example, Toys R Us). In other words, yes they have more money, but no, it does not make them more profitable. They're not profitable in either Scenario because they don't have any income in either. But in one scenario, they have $100k spendable cash, and in the other all they have is sweat equity that they claim is worth $200k compensation. With spendable cash, you have runway and the opportunity to acquire external products or services that they need for the business. With sweat equity, you have sweat and dreams of success.

FullyFunctional 6y ago

I don't see why it's not the same (Company gives $200k, issues shares, gets back $100k). 2nd point: GP said "invest 100k/year", thus he do make additional investments.

gamblor956 6y ago
Because a liquid asset is different from a liability. And the transactions have different tax, legal, and accounting outcomes. At the simplest level, you can buy things and services with the $100k cash in Scenario 2 at the start of the year as soon as the investment is made. You don't have that cash in Scenario 1.

jdxcode 6y ago

Business fundamentals are concerned with cash flow (which the investment does not change because it’s not part of income/expenses). You’re talking about the balance statement, which it would benefit but unrelated to profit. In other words, yes they have more money, but no, it does not make them more profitable.

gamblor956 6y ago
Business fundamentals are concerned with cash flow and the balance sheet. It's irrelevant to have positive cash flow if it can't service your debts (see, e.g., almost every company destroyed by a private equity firm, for example, Toys R Us). In other words, yes they have more money, but no, it does not make them more profitable. They're not profitable in either Scenario because they don't have any income in either. But in one scenario, they have $100k spendable cash, and in the other all they have is sweat equity that they claim is worth $200k compensation. With spendable cash, you have runway and the opportunity to acquire external products or services that they need for the business. With sweat equity, you have sweat and dreams of success.