3 ms·

> Yes, duh, shareholder's equity remains constant. Shareholder DILUTION however is substantial. If they collect $1 million on a patent and issue a special divid

by pedrocr 12y ago

> Yes, duh, shareholder's equity remains constant. Shareholder DILUTION however is substantial. If they collect $1 million on a patent and issue a special dividend, I'm getting $1,000 instead of $100,000. Clearly that payout was not priced into the original share price a the time of the capital raise so the new shareholders indeed got a great benefit at the expense of the old ones. At the moment of the transaction though the company went from being valued at 10$ to being valued at 100$ and for that to happen 90$ in cash was added to the company. The company could have turned around and used the same 90$ to buy back the same shares, which is why the transaction itself is neutral to shareholders. As the share price changes over time that may turn out to be a good or a bad idea.

tacos 12y ago
At the moment of the transaction the books said the company had $90 more. But this does not matter much because shares were issued. In your imagined impossibly-simple company where market cap always equals cash on hand you can ignore this. In the real world, where the Earnings Per Share suddenly dropped by a factor of 100, perhaps you can imagine what will happen to the share price.
- pedrocr 12y ago
  > In your imagined impossibly-simple company where market cap always equals cash on hand you can ignore this. In the real world, where the Earnings Per Share suddenly dropped by a factor of 100, perhaps you can imagine what will happen to the share price. I never said market cap equals cash on hand, I'm talking about the normal valuation of the company. You have a company that is valued as a whole at 10$ by the market, not just cash, everything. You raise 90$ of capital by issuing 90 new shares, bringing the total up to 100 shares. That company is now worth the original 10$ plus the new 90$ that were put in. So it's worth 100$ in total and still 1$ per share. This is just the basic math of a capital raise or dividend/share buyback, there's no way around it.
  - tacos 12y ago
    You're confusing book value with market capitalization and shareholder's equity. In your magic company they're always identical. In the real world they never are. More germane to HN: I'm a founder. I own 50.01% of my company. Issuing stock is a "neutral" event for me because I'm going to own a smaller piece of a bigger pie? C'mon dude, admit you're wrong and move on.
    - pedrocr 12y ago
      > You're confusing book value with market capitalization and shareholder's equity. In your magic company they're always identical. In the real world they never are. No I'm not. I've always referred to market cap, never accounting. > I'm a founder. I own 50.01% of my company. Issuing stock is a "neutral" event for me because I'm going to own a smaller piece of a bigger pie? At the moment of the transaction yes, it's neutral. You could use the money you just raised to buy back the shares you just issued and be back to square one. That's all I am saying and it's a basic point taught in finance classes. In fact if what you suggest happened, and the share value tanked you'd have a perpetual money making machine. Just raise a bunch of capital, watch your stock tank, buy back shares and end up owning the whole company again plus some left over cash. That doesn't mean that raising capital can't in the long term add or destroy value in a company, it's just not the transaction that does it, it's what you do or don't do with the money. If you use the money so that the total employed capital has a higher rate of return than just the original one, the value goes up, if not it goes down.
      - tacos 12y ago
        At the moment of the transaction I've also lost control of my company. So, hardly neutral. You keep ignoring dilution. Also, you can't put the genie back in the bottle and buy back as you keep proposing. Because the market gets its say. Even if there were sufficient liquidity (shares available to purchase) there's no reason to expect the price would remain constant. And if I own 49.9% and BigCorp owns 50.1%, you can imagine that share price is not going to be "pedrocr math." The world doesn't work like a basic bookkeeping class.

by pedrocr 12y ago

tacos 12y ago

At the moment of the transaction the books said the company had $90 more. But this does not matter much because shares were issued. In your imagined impossibly-simple company where market cap always equals cash on hand you can ignore this. In the real world, where the Earnings Per Share suddenly dropped by a factor of 100, perhaps you can imagine what will happen to the share price.

pedrocr 12y ago
> In your imagined impossibly-simple company where market cap always equals cash on hand you can ignore this. In the real world, where the Earnings Per Share suddenly dropped by a factor of 100, perhaps you can imagine what will happen to the share price. I never said market cap equals cash on hand, I'm talking about the normal valuation of the company. You have a company that is valued as a whole at 10$ by the market, not just cash, everything. You raise 90$ of capital by issuing 90 new shares, bringing the total up to 100 shares. That company is now worth the original 10$ plus the new 90$ that were put in. So it's worth 100$ in total and still 1$ per share. This is just the basic math of a capital raise or dividend/share buyback, there's no way around it.
- tacos 12y ago
  You're confusing book value with market capitalization and shareholder's equity. In your magic company they're always identical. In the real world they never are. More germane to HN: I'm a founder. I own 50.01% of my company. Issuing stock is a "neutral" event for me because I'm going to own a smaller piece of a bigger pie? C'mon dude, admit you're wrong and move on.
  - pedrocr 12y ago
    > You're confusing book value with market capitalization and shareholder's equity. In your magic company they're always identical. In the real world they never are. No I'm not. I've always referred to market cap, never accounting. > I'm a founder. I own 50.01% of my company. Issuing stock is a "neutral" event for me because I'm going to own a smaller piece of a bigger pie? At the moment of the transaction yes, it's neutral. You could use the money you just raised to buy back the shares you just issued and be back to square one. That's all I am saying and it's a basic point taught in finance classes. In fact if what you suggest happened, and the share value tanked you'd have a perpetual money making machine. Just raise a bunch of capital, watch your stock tank, buy back shares and end up owning the whole company again plus some left over cash. That doesn't mean that raising capital can't in the long term add or destroy value in a company, it's just not the transaction that does it, it's what you do or don't do with the money. If you use the money so that the total employed capital has a higher rate of return than just the original one, the value goes up, if not it goes down.
    - tacos 12y ago
      At the moment of the transaction I've also lost control of my company. So, hardly neutral. You keep ignoring dilution. Also, you can't put the genie back in the bottle and buy back as you keep proposing. Because the market gets its say. Even if there were sufficient liquidity (shares available to purchase) there's no reason to expect the price would remain constant. And if I own 49.9% and BigCorp owns 50.1%, you can imagine that share price is not going to be "pedrocr math." The world doesn't work like a basic bookkeeping class.