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I'm having trouble understanding how a typical investment works, and so far most textbooks are pretty vague with their language.

Let's say you invest 200 dollars in a startup (let's start small). The startup ends up collecting 50k dollars and by the end of the year the company made profits in the value of 150k dollars.

How much, as the investor, am I supposed to get out of this? Is it percentual, or are other calculation methods applied in investment?

Also, is this a one-time win as it was a one-time investment? Or once I invest in a company I get to hold shares for a certain amount of time and so can calculate with (hopefully) some gain as long as the company remains sucessfully for the next years?

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This would depend on the exact agreement between yourself and the startup. If they agree to give you x% of shares for \$200, then you are entitled to that share of the profits (unless the shares are diluted, which can happen).

A way this is sometimes phrased is that you put in \$200 at a valuation of \$50,000, meaning for the sake of this purchase you are going to pretend the companies value is \$50,000, thus \$200 entitles you to a $$ \frac{200}{50 \ 000} = 0.4\% $$ share of it.


Notes:

  1. Startups usually do not negotiate with investors who put in 200 dollars. They are looking for venture capitalists who are willing to put millions in.

  2. Some initial backers do not stay long enough to collect a share of the startup's earnings, they may exit (sell their shares) at the IPO. See "VC Ownership Post-IPO: When, Why, and How Do VCs Exit?" (2021) by Basnet et al.

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  • $\begingroup$ Worth noting that if you own 1% of the equity, you get 1% of the profits in perpetuity (assuming no changes). So you get $1,500 at the end of the year...and you still own the 1%. So you get 1% of profits for the next year as well, etc etc. $\endgroup$
    – David
    Jun 16, 2022 at 19:01
  • $\begingroup$ "Most initial backers do not stay long enough to collect a dhare of the startups earnings". Is the underlying point here that startups, even if funded by shares, don't usually declare a dividend until they are well established? $\endgroup$ Jun 16, 2022 at 19:35
  • $\begingroup$ @DavisClute I am not sure how you arrived at the $1,500. The other half of your statement is indeed the definition of owning 1% of the equity. $\endgroup$
    – Giskard
    Jun 16, 2022 at 19:36
  • $\begingroup$ @AdamBailey Well, one would have to define "startup". I mean startups that seek VC funding (large scale funding for growth); in this case the above is my understanding, but feel free to correct me if I am wrong. $\endgroup$
    – Giskard
    Jun 16, 2022 at 19:38
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    $\begingroup$ @Giskard: as you rightly point out in the first paragraph, what you get depends on the exact agreement. You could get less or more than 0.4% for 200. The second paragraph just gives one example of an agreement where the investor gets a fair share. $\endgroup$
    – BrsG
    Jul 17, 2022 at 9:17

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