How are startup shares worth more than the total investment funding?
"What littleadv said is correct.  His worth is based on the presumed worth of the total company value (which is much greater than all investment dollars combined because of valuation growth)*. In other words, his ""worth"" is based on the potential return for his share of ownership at a rate based on the latest valuation of the company. He is worth $17.5 billion today, but the total funding for Facebook is only $2.4 billion? I don't understand this. In private companies, valuations typically come from either speculation/analysts or from investments.  Investment valuations are the better gauge, because actual money traded hands for a percentage ownership. However, just as with public companies on the stock market, there are (at least) two caveats. Just because someone else sold their shares at a given rate, doesn't mean that rate... In both cases, it's possible the value may be much lower or much higher.  Some high-value purchases surprise for how high they are, such as Microsoft's acquisition of Skype for $8.5 billion. The formula for one owner's ""worth"" based on a given acquisition is: Valuation = Acquisition amount / Acquisition percent Worth = Owner's percent × Valuation According to Wikipedia Zuckerberg owns 24%.  In January, Goldman Sach's invested $500 million at a $50 billion valuation. That is the latest investment and puts Zuckerberg's worth at $12 billion. However, some speculation places a Facebook IPO at a much higher valuation, such as as $100 billion.  I don't know what your reference is for $17 billion, but it puts their valuation at $70.8 billion, between the January Goldman valuation and current IPO speculation. * For instance, Eduardo Saverin originally invested $10,000, which, at his estimated 5% ownership, would now be worth $3-5 billion." The net worth is based on an estimate of how much he would get if he relinquished his stake.  The total funding is based on how much he has relinquished thus far. Suppose I have a candy jar with 100 candies.  I'm not sure how much these candies are worth, so I start off by selling 10% of the jar for $10.  Now I have 90 candies and $10, a total value of $100.  Then someone comes along offering $100 for another 10% (of the original jar, or 10 candies), which I accept.  Now I have 80 candies and $110.  Since I value each candy at $10 now, I calculate my worth as $910.  Then I do another deal selling 10% for $1000.  Now I have $1110 in cash and 70 candies valued at $100 each.  My total worth is now $8110 (cash + remaining candies), while the candy jar has only received $1110 in funding. Replace candies with equity in The Facebook, Inc. and you get the idea. He is worth $17.5 billion today Note that he is worth that dollar figure, but he doesn't have that many dollars. That's the worth of his stake in the company (number of shares he owns times the assumed value per share), i.e. assuming its total value being several hundreds of billions, as pundits assume. However, it is not a publicly traded company, so we don't really know much about its financials.
No. Not directly. A company issues stock in order to raise capital for building its business. Once the initial shares are sold to the public, the company doesn't receive additional funds from future transactions of those shares of stock between the public.  However, the company could issue more shares at the new higher price to raise more capital. Selling stock means selling a portion of ownership in your company.  Any time you issue stock, you give up some control, unless you're issuing non-voting stock, and even non-voting stock owns a portion of the company. Thus, issuing (voting) shares means either the current shareholders reduce their proportion of owernship, or the company reissues stock it held back from a previous offering (in which case it no longer has that stock available to issue and thus has less ability to raise funds in the future).  From Investopedia, for exmaple: Secondary offerings in which new shares are underwritten and sold dilute the ownership position of stockholders who own shares that were issued in the IPO. Of course, sometimes a secondary offering is more akin to Mark Zuckerberg selling some shares of Facebook to allow him to diversify his holdings - the original owner(s) sell a portion of their holdings off.  That does not dilute the ownership stake of others, but does reduce their share of course. You also give up some rights to dividends etc., even if you issue non-voting stock; of course that is factored into the price presumably (either the actual dividend or the prospect of eventually getting a dividend).  And hopefully more growth leads to more dividends, though that's only true if the company can actually make good use of the incoming funds. That last part is somewhat important.  A company that has a good use for new funds should raise more funds, because it will turn those $100 to $150 or $200 for everyone, including the current owners.  But a company that doesn't have a particular use for more money would be wasting those funds, and probably not earning back that full value for everyone. The impact on stock price of course is also a major factor and not one to discount; even a company issuing non-voting stock has a fiduciary responsibility to act in the interest of those non-voting shareholders, and so should not excessively dilute their value. "There is a legal document called a ""Stock Purchase Agreement"" and it depends on who is the other party to the buyer in the Agreement. In almost all startups the sale goes through the company, so the company keeps the money. In your example, the company would be worth $10,000 ""Post-Money"" because the $1k got 10% of the Company." There are a LOT of variables at play here, so with the info you've provided we can't give you an exact answer.  Generally speaking, employee options at a startup are valued by a 409a valuation (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_409A) once a year or more often.  But it's entirely possible that the company split, or took a round of funding that reduced their valuation, or any other number of things.   We'd need a good bit more information (which you may or may not have) to really answer the question. Similar premise, yes. It's an investment so you're definitely hoping it grows so you can sell it for a profit/gain. Public (stock market) vs. private (shark tank) are a little different though in terms of how much money you get and the form of income.    With stocks, if you buy X number of shares at a certain price, you definitely want to sell them when they are worth more. However, you don't get, say 0.001% (or whatever percentage you own, it would be trivial) of the profits. They just pay a dividend to you based on a pre-determined amount and multiply it by the number of shares you own and that would be your income. Unless you're like Warren Buffet and Berkshire who can buy significant stakes of companies through the stock market, then they can likely put the investment on the balance sheet of his company, but that's a different discussion. It would also be expensive as hell to do that.    With shark tank investors, the main benefit they get is significant ownership of a company for a cheap price, however the risk can be greater too as these companies don't have a strong foundation of sales and are just beginning. Investing in Apple vs. a small business is pretty significant difference haha. These companies are so small and in such a weak financial position which is why they're seeking money to grow, so they have almost no leverage. Mark Cuban could swoop in and offer $50k for 25% and that's almost worth it relative to what $50k in Apple shares would get him. It's all about the return. Apple and other big public companies are mature and most of the growth has already happened so there is little upside. With these startups, if they ever take off then and you own 25% of the company, it can be worth billions. Shares in a company represent a portion of a company. If that company takes in money and doesn't pay it out as a dividend (e.g. Apple), the company is still more valuable because it has cold hard cash as an asset. Theoretically, it's all the same whether your share of the money is inside the company or outside the company; the only immediate difference is tax treatment.  Of course, for large bank accounts that means that an investment in the company is a mix of investment in the bank account and investment in the business-value of the company, which may stymie investors who aren't particularly interested in buying larve amounts of bank accounts (known for low returns) and would prefer to receive their share of the cash to invest elsewhere (or in the business portion of the company.) Companies like Apple have in fact taken criticism for this. Your company could also use that cash to invest in itself (growing the value of its profits) or buy other companies that are worth money, essentially doing the job for you. Of course, they can do the job well or they can do it poorly... A company could also be acquired by a larger company, or taken private, in exchange for cash or the stock of another company. This is another way that the company's value could be returned to its shareholders. "Hi Amy,  thank you for your article.  Got to say however that I tend to disagree.  I've been through the venture rabbit hole a number of times.  Each one was an experience I'll never forget and wouldn't trade for anything.  I learned so much more about how the business world actually works (or...doesn't) than I would have at some more established company.    That said, I am also quite sour on the whole VC thing and at my most recent startup we've foregone outside investors and bootstrapped things from the get go.  It was probably the best decision we made because it allowed us to be flexible in our strategy and not always beholden to the ""quick exit"" that VC money always drives.     However, I realize that not all businesses can be like ours.  We started off as a consulting company and moved into build products as our cash reserve grew.  If we had wanted to do something big, or fast, or perhaps manufacture something, we would never have had the capital to get it going.  Those types of business *need* outside funding, and generally it's only VCs who are willing to take the 1 in 20 bet that startups usually entail.  For that, I'm glad that VCs are there, and think they provide a very valuable service and part of our economy.  I just don't ever want to have to deal with them again..." "A share of stock is a share of the underlying business. If one believes the underlying business will grow in value, then one would expect the stock price to increase commensurately. Participants in the stock market, in theory, assign value based on some combination of factors like capital assets, cash on hand, revenue, cash flow, profits, dividends paid, and a bunch of other things, including ""intangibles"" like customer loyalty. A dividend stream may be more important to one investor than another. But, essentially, non-dividend paying companies (and, thus, their shares) are expected by their owners to become more valuable over time, at which point they may be sold for a profit. EDIT TO ADD: Let's take an extremely simple example of company valuation: book value, or the sum of assets (capital, cash, etc) and liabilities (debt, etc). Suppose our company has a book value of $1M today, and has 1 million shares outstanding, and so each share is priced at $1. Now, suppose the company, over the next year, puts another $1M in the bank through its profitable operation. Now, the book value is $2/share. Suppose further that the stock price did not go up, so the market capitalization is still $1M, but the underlying asset is worth $2M. Some extremely rational market participant should then immediately use his $1M to buy up all the shares of the company for $1M and sell the underlying assets for their $2M value, for an instant profit of 100%. But this rarely happens, because the existing shareholders are also rational, can read the balance sheet, and refuse to sell their shares unless they get something a lot closer to $2--likely even more if they expect the company to keep getting bigger. In reality, the valuation of shares is obviously much more complicated, but this is the essence of it. This is how one makes money from growth (as opposed to income) stocks. You are correct that you get no income stream while you hold the asset. But you do get money from selling, eventually." "No, a jump in market capitalization does not equal the amount that has been invested.  Market cap is simply the stock price times the total number of shares. This represents a theoretical value of the company. I say ""theoretical"" because the company might not be able to be sold for that at all.  The quoted stock price is simply what the last buyer and seller of stock agreed upon for the price of their trade. They really only represent themselves; other investors may decide that the stock is worth more or less than that.  The stock price can move on very little volume. In this case, Amazon had released a very good earnings report after the bell yesterday, and the price jumped in after hours trading. The stock price is up, but that simply means that the few shares traded overnight sold for much higher than the closing price yesterday.  After the market opens today and many more shares are traded, we'll get a better idea what large numbers of investors feel about the price. But no matter what the price does, the change in market cap does not equal the amount of new money being invested in the company. Market cap is the price of the most recent trades extrapolated out across all the shares." For each class A share (GOOGL) there's a class C share (GOOG), hence the missing half in your calculation. The almost comes from the slightly higher market price of the class A shares (due to them having voting powers) over class C (which have no voting powers). There's also class B share which is owned by the founders (Larry, Sergei, Eric and perhaps some to Stanford University and others) and differs from class A by the voting power. These are not publicly traded. It's been awhile since my last finance course, so school me here:  What is the market cap of a company actually supposed to represent? I get that it's the stock price X the # of shares, but what is that actually representing? Revenues? PV of all future revenues? PV of future cash flows?  In any case, good write up. Valuation of tech stocks is quite the gambit, and you've done a good job of dissecting it for a layman. Yep, a lot of startup funding these days is called equity, which makes for nice valuation, but there are often so many extra stipulations (I've even read of caps on upside; wish I could find the Matt Levine column on it now) that it really is effectively debt. Presumably you're talking about the different share class introduced in the recent stock split, which mean that there are now three Google share classes: Due to the voting rights, Class A shares should be worth more than class C, but how much only time will tell. Actually, one could very well argue that a non-voting share of a company that pays no dividends has no value at all. It's unlikely the markets will see it that way, though. If the company's ownership is structured similarly to a typical start-up then an 1% employee ownership in a company which sells for 1 million will yield far less than 10k due to various liquidation preferences of the investors, different share classes, etc.  It's pretty hard to get a specific number because it depends a lot on the details of earlier fundraising and stock grants.    That said, unless the company is circling the drain and the sale was just to avoid BK, the share price you get should be higher unless the share class structure and acquisition deal are completely unfair. A company generally sells a portion of its ownership in an IPO, with  existing investors retaining some ownership.  In your example, they believe that the entire company is worth $25MM, so in order to raise $3MM it is issuing stock representing 12% of the ownership stake (3/25), which dilutes some or all of the existing stockholders' claims.