First, I apologize if this has been asked/answered before. Was not really sure how to search for the answer so I'm asking it here.
To me, it has always seemed like a business is a thing. A thing with value that someone, or a group of people can own. It makes a lot of sense, that I could sell you some percentage of that thing, for that percentage of that thing's value.
For example, say I have some business that we agree the value is $50,000. If I sell you 50% of it, I would expect you to pay me $25,000, and that all makes sense. In this example the money would be going directly to me.
Where I get confused, is that it seems the purpose of looking for investment, is to increase the capital of the business so that it can function, and achieve its goals more easily.
So let's amend our example. I give the business $25,000 and take 50% of the business. Well now the business is worth $75,000 so my $25,000 investment just bought a value of $37,500 which is unfair to the original owner of the business.
I ask this mainly, because this seems to be the scheme used on shows such as Dragon's Den. They need money for the business, but base the valuation of the business as whatever it was worth before sinking capital into it.
I suppose I don't have a clear cut thesis, but just wondering where I'm incorrect. Surely the investor doesn't make money immediately upon making the deal. That doesn't make sense to me.
It might not be clear so let me try to summarize it succinctly, with a direct question.
When I invest in a business valued at $50,000, I pay $25,000 and receive 50% equity. Does that $25,000 go to the current owner of the business, or into the capital of the business itself?