Does an equity investment fund the company or its owner?

When an investor pays cash for newly issued shares, the company receives the money. When the investor pays the founder for existing shares, the selling founder receives it. A mixed transaction can do both. Announcing a new investor does not, by itself, tell you which need has been funded.

The same check, two destinations

Assume an invented company has 100 ordinary shares, all owned by its founder. The parties agree those existing shares together are worth $2 million. For this illustration, every share has the same economic rights and the transaction has no fees or other adjustments.

If an investor pays the founder $500,000 for 25 of the existing shares, the investor owns 25 percent and the founder keeps 75 percent. The founder receives the $500,000. The company has not received new cash.

If the investor instead pays $500,000 to the company for 25 newly issued shares at the same $20,000 price per share, there are now 125 shares. The investor owns 20 percent and the founder owns 80 percent. The company receives the $500,000; the founder receives none personally.

The check is the same size. The resulting percentages differ because the second transaction adds shares to the total. The money also goes to a different place. That difference is the purpose of the example, rather than a reason to prefer one structure in every situation.

Chapter 12 of Infinite Upside separates those purposes before comparing percentages. The owner may want capital for expansion, personal liquidity or some combination. A transaction should be designed around where the money is needed.

Read the dilution record

When the company issues new shares, an existing holder can keep every share and own a smaller fraction. The SEC glossary calls this dilution. Put the share counts beside the percentage before deciding what has changed.

For a separate fictional closing, Mira owns 6,000 common shares and a colleague owns 2,000. All 8,000 are outstanding with identical economic and voting rights. The company has 12,000 authorized shares in total; the other 4,000 are unissued. There are no options, warrants, reserved award pool, convertible instruments, preferred shares or other share entitlements.

An investor pays the company $60,000 for 2,000 newly issued shares at $30 each. All approvals and the full payment are complete. No existing shares are sold, and no fees, deductions or other transactions change the closing. There are now 10,000 outstanding shares and 2,000 authorized but unissued.

This separate company's primary issue

Scroll across to compare counts and ownership. Use the arrow keys when the table area is focused.

Mira's ownership falls by 15 percentage points, from 75 to 60 percent. Relative to her former fraction, the reduction is 20 percent: 15 divided by 75. She has sold none of her 6,000 shares. The authorized but unissued shares do not enter either outstanding-share denominator.

Using the agreed $30 issue price, the 8,000 old shares amount to $240,000 before the new money; all 10,000 amount to $300,000 afterward. On this round's price basis, pre-money plus the $60,000 investment equals post-money. Mira's 6,000 shares still amount to $180,000 on that same basis, despite the smaller percentage. Neither figure establishes an available buyer, an exit price or a distribution.

Keep the counting basis and date attached to each figure. The company received the $60,000; Mira received no cash. The guide to equity compensation follows the separate question of shares an option might create. Do not add those hypothetical shares to this closing, which has no options.

Why a combined transaction needs two accounts

A founder may want the company to expand without leaving all personal resources exposed to the same business. A mix of new and existing shares can address both aims. Keep the funding of the company and the payment to its owner explicit, even if one investor supplies both.

Otherwise a growth plan can be drawn around money the company will never receive. Or the founder can plan a personal purchase using funds that belong to the company. A share transaction does not make a dollar available in both places.

Before comparing proposals, write down the company’s intended use of proceeds and the owner’s intended use separately. If only one is funded, the other still needs an answer. That is often more consequential than a small difference in the ownership percentage.

A percentage does not describe every right

The invented example deliberately uses identical ordinary shares. Real proposals can include different voting arrangements, distribution preferences, board roles or decisions requiring another owner’s consent. A majority percentage alone cannot describe all the freedom an owner will retain.

Chapter 12 puts that concern in practical terms. An owner seeking relief from pressure could receive money and still find ordinary decisions slower or future distributions less flexible. A shareholder who supports growth can have a different timetable for realizing it.

Read the proposed relationship through a few actual future choices: approving the next investment, paying a distribution, adding borrowing and responding to a buyer. Who can decide each? What information must they receive? What happens if they disagree?

Then return to the original purpose of the transaction. If the company needs money, check the amount that will reach it. If the founder needs liquidity, check what reaches them and what responsibilities remain.