"Say for example your company currently has 1,000,000 shares outstanding. You and the investors settle on a valuation of $1 per share for a pre-money valuation of $1,000,000. The investors put in $250,000 and in exchange they are issued 250,000 shares. The post money valuation of the company is $1,250,000 and investors own 20% of the company."
I have trouble understanding this. Why do they only own 20% of the company, if they own 25% of the shares?
I guess it is also a complication that the investment actually changes the value of the company (because it now has 250000$ more)? But wouldn't it make more sense to conclude that if an $250000 investment buys you 25% of the company, it is evaluated at 750000$ (before the investment)?
Sorry if I get this completely wrong, I am not used to those calculations.
On the other hand, how can shares simply be created? Is this how people get "diluted"? Like before this transaction, some other guy owns 10% of the company, and afterwards suddenly he only owns 8% - how is that possible? By claiming in theory that his 8% still have the same value in cash? But since all those are just virtual estimates, not hard transactions, how can you ever be safe from being screwed over?
I have trouble understanding this. Why do they only own 20% of the company, if they own 25% of the shares?
I guess it is also a complication that the investment actually changes the value of the company (because it now has 250000$ more)? But wouldn't it make more sense to conclude that if an $250000 investment buys you 25% of the company, it is evaluated at 750000$ (before the investment)?
Sorry if I get this completely wrong, I am not used to those calculations.