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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 ar

by 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.
  - pedrocr 12y ago
    >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. Ok, so what price would the market set for a share in the company we discussed before? Assume the original 10$ valuation was fair and that there are now 100 shares after issuing 90$ worth of new ones. What's the new price? Above or below 1$?
    - tacos 12y ago
      The company previously had $0 in cash and 10 shares outstanding. Price was $1 at market close. They issue 90 shares. In your world these magically sell for $1 and you can just reverse the transaction and everything's back where you started. Neutral transaction! However I went from holding 10% of a company to 1% of a company. If I was holding the stock because I thought the company would sell for 100x my investment -- $100 sale to a competitor and that I'd get $10 -- well, now I'm a 1% owner and it doesn't seem like they're going to sell. And I'm also not likely to be interested in holding a $1 stock for potential payoff of $1. (Since I know their burn rate is $10/month and now increasing, I don't give a damn about the cash on hand, never did.) How about other scenarios? a) The company announces it's entering a brand new, high-risk market and it's issuing 90 new shares on the open market. Market opens. What's the price? b) Same as a) but company announces it will be suspending its dividend for 1 year. Market opens. What's the price? c) Company announces that it entered into a strategic marketing agreement with Salesforce in exchange for a private issue of 90 shares at $1. Market opens. What's the price? d) Company announces it granted 90 options to its new star CEO and issued 90 shares to cover. Market opens. What's the price? e) Company announces it borrowed $90 from Warren Buffett at 10% interest and also gave him warrants for 90 shares at $1. Market opens. What's the price?
      - pedrocr 12y ago
        You're deflecting. Creating a bunch of scenarios where other things than just the capital raise happen that impact the valuation of the company. In the simple case of a 90$ capital raise in a company that was previously worth 10$. Nothing else changes. What happens to the price in your opinion?
deleted 12y ago
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by tacos 12y ago

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.
- pedrocr 12y ago
  >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. Ok, so what price would the market set for a share in the company we discussed before? Assume the original 10$ valuation was fair and that there are now 100 shares after issuing 90$ worth of new ones. What's the new price? Above or below 1$?
  - tacos 12y ago
    The company previously had $0 in cash and 10 shares outstanding. Price was $1 at market close. They issue 90 shares. In your world these magically sell for $1 and you can just reverse the transaction and everything's back where you started. Neutral transaction! However I went from holding 10% of a company to 1% of a company. If I was holding the stock because I thought the company would sell for 100x my investment -- $100 sale to a competitor and that I'd get $10 -- well, now I'm a 1% owner and it doesn't seem like they're going to sell. And I'm also not likely to be interested in holding a $1 stock for potential payoff of $1. (Since I know their burn rate is $10/month and now increasing, I don't give a damn about the cash on hand, never did.) How about other scenarios? a) The company announces it's entering a brand new, high-risk market and it's issuing 90 new shares on the open market. Market opens. What's the price? b) Same as a) but company announces it will be suspending its dividend for 1 year. Market opens. What's the price? c) Company announces that it entered into a strategic marketing agreement with Salesforce in exchange for a private issue of 90 shares at $1. Market opens. What's the price? d) Company announces it granted 90 options to its new star CEO and issued 90 shares to cover. Market opens. What's the price? e) Company announces it borrowed $90 from Warren Buffett at 10% interest and also gave him warrants for 90 shares at $1. Market opens. What's the price?
    - pedrocr 12y ago
      You're deflecting. Creating a bunch of scenarios where other things than just the capital raise happen that impact the valuation of the company. In the simple case of a 90$ capital raise in a company that was previously worth 10$. Nothing else changes. What happens to the price in your opinion?

deleted 12y ago

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