Tom, Dick, and Harry decide to start a software company. They sell half the company for 1ドル million dollars to investors. The investors now have 1ドル million worth of stock; Tom, Dick, and Harry now have 1ドル million worth of stock; and the company has 1ドル million in the bank.
Where did the extra 2ドル million come from? --StanSilver
I don't think I understand:
Before. Tom&co have 2ドルM stock; investors have 1ドルM in bank. => 3ドルM After. Tom&co have 1ドルM stock and 1ドルM in bank; investors have 1ドルM stock => 3ドルM
Seems to sum to me. -- SunirShah
This riddle is a bit more interesting, as stock is often easily convertable to money. As I see it, the "extra" amount is only 1ドル million, however. Here is the scenario:
BeforeTom&co have 100% control of the corporation; investors have 1ドルM in bank. => 1ドルM
AfterTom&co have 50% control of the corporation and 1ドルM; investors have 50% control. Presumably, Tom&co could sell the other 50% for 1ドルM and have 2ドルM in the bank (and no control).
In some ways, this is similar to the house-building riddle, except that the valuable creation is control of the corporation.
One reason I find this interesting is that much of the value of some companies (famously "internet" companies) is this "extra" value. For instance, a company might make only 10% of its shares available for public trading. Suppose there are 10M shares, and only 1M are publically traded. The stock price is 30,ドル so the company is valued at 300ドルM. However, only 30ドルM of stock has been bought by the public. If the company tried to quickly sell another 5M shares (out of its 9M holdings), they would probably drop the price significantly.
Yet another interesting quirk happens when a company decides to create more shares (not by splits, but by issuing more new shares). This practice (called "dilution") reduces the control of the existing shareholders, but it can often be approved by a majority of shareholders. --CliffordAdams
The point I was trying to make was:
Before. Tom&co have nothing; investors have 1ドルM in bank. => 1ドルM Then. Tom&co have 2ドルM stock; investors have 1ドルM in bank. => 3ドルM After. Tom&co have 1ドルM stock and 1ドルM in bank; investors have 1ドルM stock => 3ドルM
How do you get from before to then? We have decided effort can be turned into money (sold), but Tom&co sure don't exert 2ドルM worth of effort between startup and IPO. --StanSilver
The short answer is: the investors believe that Tom&co have created 2ドルM of value in that time. That value is probably not immediate, but the investors believe that Tom&co is their best investment. If the investors could reproduce Tom&co's value for much less than 2ドル million, they would do better to reproduce it ("steal the idea") and have 100% control. Forces like patents, specialized expertise, time-to-market, or even just catchy trademarks can easily cost more than 2ドルM to reproduce. --CliffordAdams (who remembers Yahoo! when it was two guys with some bookmarks, not a 50ドル billion company)
Yes, I agree. I believe that Tom&co have created 2ドルM of value in that time, but not by 2ドルM of effort. My belief is that the 2ドルM represents the net present value of the future earnings of the company they created.
This is interesting. Assume net present value of an income stream can be approximated by "how much money in the bank would generate the same cash flow". Thus, at 10% interest, 50,000 a year has a net present value of 500,000ドル.
Also assume you have ten programmers, each making 50,000ドル a year. Total income is 500,000ドル a year. Total net present value is 5ドルM. Then, the programmers shake hands, agreeing to form a company that will make 2ドルM a year. The new net present value is 20ドルM. Poof. 15ドルM created by ten people shaking hands. --StanSilver (anybody want to shake hands?)
Tom, Dick, and Harry decide to start a software company. They have a great idea that would be worth 2ドル million + their salaries and expenses, but it will cost 1ドル million to get off the ground. Without the 1ドル million to back it up, the idea is worthless.
So the company sells half of itself for 1ドル million dollars to investors. The investors now have 1ドル million worth of stock; Tom, Dick, and Harry now have 1ドル million worth of stock; and the company has 1ドル million in the bank.
Where did the extra 2ドル million come from?
Yes, 2ドル million is created. The transaction made the 2ドル million idea possible, and that is reflected in the stock. The 1ドル million may be spent soon, but workers and suppliers will get the money, so it will not disappear. (In other words, we can expect this 1ドル million to be created via EconomicRiddleOne, if necessary. Of course, there are similar processes for destroying money.)
It should be noted that 2ドル million of stock is NOT quite the same as 2ドル million of cash money -- nobody (knowledgeable and sane) completely relies on being able to sell a stock for the same price a month from now as it is worth today, whereas most people rely on being able to withdraw the same amount from a bank a month from now as they have today.