0

I have always had a curiosity since a very long time about ordinary people who become very rich (millionaires, billionaires..). But I have a feeling that this is going to be a silly question, so please pardon me if it is too silly, I am here just to learn about a simple thing.

How do people who become billionaires get such a stake (share) in their company that make them very rich? Consider Jeff Bezos. He was just like anyone else (financially). He was nowhere near the category of even millionaires I guess. But he had a powerful idea about an everything online store that went on to become the most popular thing. But he certainly did not have so much money to open up facilities etc. to fund his brilliant idea. He had to utilise money from investors. And the investors, hence, got the majority share in the company (like 95% or so) and the remaining an be considered to be possessed by Jeff Bezos (who had little money to contribute in it). This way, if Amazon gets successful, the person who would profit the most will be that investor(s) who invested in Jeff Bezos' idea. How did Jeff Bezos become the richest person then? Why not that/those investor(s) who initially funded his project?

So the question is: Is having a brilliant idea enough to claim the majority share of a company even though the creator has nothing in their own pockets? If an investor funds a project fully, does that mean he will own the majority of the share (say 95% of the profits)?

How does all this work? How do people who have nothing in their pocket go on to become the richest people just by a single idea? As far as I know, only money can generate more money. If you have money, you can invest, own the majority shares, and become even more super-rich if the project (like Amazon) thrives. But if you just have an idea, not money, how could you go on to become the richest person? How does all this work?

Thank you and kind regards.

2 Answers 2

2

And the investors, hence, got the majority share in the company (like 95% or so) and the remaining an be considered to be possessed by Jeff Bezos (who had little money to contribute in it)

Why would an person that started a company sell 95% of the company to the early investors. That means that those investors control the company. That means that the founders ideas, vision, and effort is no longer wanted.

Steve Jobs and Steve Wozniak were poor, and they need financing to build the Apple II, but they didn't give control to the outside investors. Of course later on Jobs lost control of the company.

Those people on Shark Tank don't give up too much of their company or they won't control the direction of the company.

So the question is: Is having a brilliant idea enough to claim the majority share of a company even though the creator has nothing in their own pockets? If an investor funds a project fully, does that mean he will own the majority of the share (say 95% of the profits)?

Yes having the brilliant idea, or a brilliant product, or a patent can be enough to claim 95% of the company. In many cases the outside investor is just a source of money. Sometimes they do bring advice and expertise. Many of these investors are happy with a small part of the company. Even if they start with 20%-30%, they sell when the company goes public.

5
  • 1
    Your answer is very helpful. I can't upvote as I don't have enough reputation. Thank you for being so understanding and tolerant (to my silly question:-)). So if someone has a brilliant idea, but no money to fund it (and suppose it requires a lot of money, say 5 million dollars), and if some investors agree to fund, the investors may own no more than 5-10% of the the company even though LITERALLY ALL OF THE MONEY CAME FROM THEIR POCKETS WITHOUT WHICH THE BRILLIANT IDEA WAS USELESS. (1) Is this right? (2) So how much someone invests doesn't determine how much they own?
    – Jay Shah
    Commented Sep 26, 2020 at 13:53
  • I previously thought that it is all about money. (3) If you invest 25% of the required funds, you own 25% of it. Please tell me this is wrong (if I have understood right).
    – Jay Shah
    Commented Sep 26, 2020 at 13:53
  • 3
    @Jay Shah: How much of a "brilliant idea" company the initial investors own is really up to bargaining between them and the person with the idea. They might think the idea's brilliant enough that it'd be worth paying $5 million for 5% of the company. If it's not so brilliant, they might want 20%, 40%, or more for the same amount.
    – jamesqf
    Commented Sep 26, 2020 at 16:38
  • @jamesqf Great addition to mhoran_psprep's answer. Thank you!
    – Jay Shah
    Commented Sep 26, 2020 at 16:52
  • 2
    @JayShah It works both ways, the money was also useless without the brilliant idea and execution. If they just needed money then why didn't the investor start the company themselves? Commented Sep 28, 2020 at 11:53
2

Consider Jeff Bezos. He was just like anyone else (financially).

Ah, SERIOUSLY? As per wikipedia: His last job pre Amazon "He worked there from 1988 to 1990.[32] He then joined D. E. Shaw & Co, a newly-founded hedge fund with a strong emphasis on mathematical modelling in 1990 and worked there until 1994. Bezos became D. E. Shaw's fourth senior vice-president at the age of 30.[". I assume anyone else also becomes the youngest VP in a hedge fund? And the earlier parts of his career let me assume he was well into being a millionaire at this stage.

The main point then is you have one VERY naive assumption - that there is A (as in singular) initial investor. It is not. As per the same wikipedia page:

He accepted an estimated $300,000 from his parents and invested in Amazon.[35] He warned many early investors that there was a 70% chance that Amazon would fail or go bankrupt.

So, there where a number of investors. It is likely many cashed out earlier or are rich - just they own a smaller part of the pie. There is not "ONE" investor.

How do people who have nothing in their pocket go on to become the richest people just by a single idea?

By owning a significant part of the initial small company which they turn into this market giant over many years of hard work.

But if you just have an idea, not money, how could you go on to become the richest person?

By now selling the majority of your shares.

8
  • I am really sorry for behaving naive, but I HAVE to ask this way so that I solve my query here. I will appreciate your coordination. I understand that there was not one single investor, instead many investors. I also see that Jeff was on a very big role that a normal person struggles to reach to. But my question, put simply, is this:-
    – Jay Shah
    Commented Sep 26, 2020 at 13:31
  • Suppose X had a brilliant idea. He had the idea but not money. He asked for $500000 from some investors. This way the investors got the majority of the shares. Now if his company becomes popular, who will get rich? The people who owned the majority of shares, right? That is the investors. How exactly is it decided how much shares are owned by the founder (with nothing in his own pocket)? Perhaps using Jeff Bezos' example is far too exaggerated. Sorry for that.
    – Jay Shah
    Commented Sep 26, 2020 at 13:34
  • Also, it will be really helpful if you can tell me how much of the shares Jeff Bezos' gave other investors to fund Amazon, and how much actually did he keep with himself?
    – Jay Shah
    Commented Sep 26, 2020 at 13:37
  • 1
    "He asked for $500000 from some investors. This way the investors got the majority of the shares." and X is officially an idiot. Period. Simple like that. X has the power - IF the idea is seriously brilliant, then he is an idiot to give away the majority of the shares. Also, BASE SCHOOL MATH: If he gives away 60% and keeps 40% and has 10 investors of equal share - he has 40% and every investor 6%. See how that works out?
    – TomTom
    Commented Sep 26, 2020 at 14:25
  • 1
    Well, they are related, but yes - at the end of the day it is negotiation power, especially at the beginning. And the founder often ends up with 50+ % because if that is too low - he may just walk away. This is all negotiation. There is no big company, no established price.
    – TomTom
    Commented Sep 26, 2020 at 14:35

Not the answer you're looking for? Browse other questions tagged .