Comment by doggosphere | Hacker News Reader

Comment by doggosphere | Hacker News Reader

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Stock represents actual ownership of a scarce resource (a company).

Is there a limit to how many shares a company can issue? No, a board can technically issue shares unto infinity. There is no guarantee of scarcity, no guarantee they will not raise more money.

That company would have value whether or not it was explicitly sold as a stock. The value doesn’t come from the stock.

So when a company has no profit but a high valuation, is this the market correctly discounting future predicted cashflows and giving a company fair value, or is it some sort of scam? Ex: Is NKLA actually a $5.2b electric vehicle company? How about the spade of Chinese IPOs that ended up being vaporware?

Cryptocurrency removes the underlying asset and simply sells shares of artificial scarcity.

The scarcity isn't artificial. It's mathematically provable, open source and auditable. If you think you can manufacture "fake" btc on the blockchain, feel free to try. If you think you can successfully fork and create a whole new chain, you're also welcome to try.

It’s only as valuable as what people decide to trade it at, because it doesn’t represent ownership of anything other than itself.

This is actually factual for anything in existence. A piece of bread. A $100m painting. You're starting to figure out what peculiar creatures humans are.

> Is there a limit to how many shares a company can issue? No, a board can technically issue shares unto infinity. There is no guarantee of scarcity, no guarantee they will not raise more money.

The scarce asset is the company, not the shares. Yes, they can issue more shares, but those shares still represent the same company plus the new investment money raised by raising the shares. They're not creating more company out of thin air when they issue more shares.

EDIT: To clarify some misconceptions in the comments below: When a company sells more shares into the market they are not simply diluting away existing shareholders. The keyword is that they are selling shares, meaning they take money in exchange for shares. The company's value increases by the amount of money they take in exchange for the sale.

Example: If a company is worth $1,000,000 and has 1,000,000 shares outstanding, each share is worth $1. If the company decides to sell another 100,000 shares and the market buys them at $1/each, there are now 1,100,000 shares outstanding and the company is now worth $1,100,000 because they took in $100,000 of cash via share sales. Existing shareholders have not lost any money or value.

It doesn't matter if it represents the company because the thing that shareholders care about is how much $ each share represents. This is why a stock will tank when a company talks about diluting their existing shares by creating new shares out of thin air. What you're talking about would be more akin to a stock split.

When a company sells more shares, they money they raise from selling those shares contributes to the value of the company.

If a company sells 100,000 shares at a dollar each, the company is now worth $100,000 more because they now have another $100,000 on their balance sheet. No value is lost in this process.

> This is why a stock will tank when a company talks about diluting their existing shares by creating new shares out of thin air.

Companies can't just declare that more shares exist and dilute away shareholders like you said. They either issue them as stock based compensation, which is an expense, or they sell the shares to buyers, which means money goes toward their bottom line.

Value is lost to existing shareholders who have the value of their shares diluted. Everything you're saying may seem logical, but economics is often illogical and any 1:1 $:stock sales still tank the share price.

> Value is lost to existing shareholders who have the value of their shares diluted.

You're confusing percentage dilution with absolute diluation.

The shares represent the value of the company. The value of the company has increased by the amount of money raised. Each share represents a lower percentage of the company, but this is offset by the fact that the value of the company has increased by the amount of money raised. The shares have not been diluted on an absolute value scale.

Owning 10% of a company worth $1mm is the same value as owning 5% of a company worth $2mm.

If you own 10% of a $1mm company that raises another $1mm by selling more shares, you now own 5% of a 2mm company. Your percentage ownership is diluted, but your value has not been stolen.

This is basic pre- and post-investment math. Shareholders are diluted on a percentage basis, but not on an absolute basis.

Assuming all shares are equal in class, voting power is diluted.

You continue to make a 1:1 assumption. Dilution can cause the stock to go down because of FUD of financial health. It can go up because of strong leadership and optimistic futures. It's not occurring in a vacuum where $1 is 1 share and +$1 to company worth.

Yes but a company doing something that causes the market to value shares less isn’t dilution. The fact that you know how the market will respond to companies raising capital by issuing new shares doesn’t change the legality of it.

But raising money might also cause the stock to go up, right? More investment signals confidence and planned growth. More people may want to buy in.

Issuing new shares is not always a good move and sometimes it might cause investors to lose money and percentage ownership, but sometimes it might be a good move and result in investors gaining money (though still getting their ownership diluted).

I don't really care about how much of the balance sheet I could lay claim to during a liquidation. That's going to be pennies on the dollar, or nothing.

I care how much of future profits will be returned to be, which does depends on the percentage I end up owning. A round needs to enable a bigger gain than the fraction it dilutes everyone.

That would very much depend on what you're buying stock in. Holding companies and investment companies are mostly valued to what your "share" of their holdings is worth. Real estate too.

OP was responding about stocks being just as much "multi level marketing" because you still need someone to sell the shares to, someone willing to pay more for it than you did. So it is actually irrelevant to scarcity or "intrinsic value".

> but those shares still represent the same company plus the new investment money raised by raising the shares.

No. Your shares were _diluted_ by the company issuing new shares. Now your 100 shares are worth half as much. Shares have predicted forward value embedded in their valuation. When you buy a share, you're betting that company will continue to grow. If it's having to raise money and issue new stock, odds are it's struggling with cash on hand. Maybe the bet will work out for you. Maybe not. Stocks are gambling, though, don't let yourself believe otherwise.

> No. Your shares were _diluted_ by the company issuing new shares. Now your 100 shares are worth half as much.

That's not correct. A company sells shares in exchange for cash. That cash is owned by the company, which is represented by the shares.

Companies can't simply dilute away their shareholders like you're suggesting. The money raised by selling shares doesn't simply disappear.

I own 10% of a company. Several rounds later, I now own 2% of the company. It is possible the company is now valued higher or lower than what I got in at.

Did I get diluted?

The concept of "non-voting shares" exists, so the answer is "maybe, depending what you value".

> Companies can't simply dilute away their shareholders like you're suggesting. The money raised by selling shares doesn't simply disappear.

Yes, they can and yes they do, all the time. That's not only precisely how VC funding works in the early stages of a startup raising seed money and subsequently doing Series A, B, etc. that's also how public financing works via new share offerings on a public marketplace like NYSE or NASDAQ.

GameStop is about to do precisely this very thing: https://abcnews.go.com/Business/wireStory/gamestop-finally-a...

The cash they receive has no forward value. $1 will be worth $1 in 10 years. When you buy shares, you are betting on future value. When a company trades new shares for cash, it is trading some portion of its future value for cash today.

Not only that, but the cash on hand can disappear rather quickly (after all, they are raising it to spend it) depending on the company's expenditures, cost of new customer acquisition and whether its growth strategy is working or not.

Also, shareholders are the last to be compensated in the event of a bankruptcy or liquidation. Bondholders take preference.

> That's not only precisely how VC funding works in the early stages of a startup raising seed money and subsequently doing Series A, B, etc.

The concept of "pre-money" and "post-money" valuations exist for precisely this reason. You can read more here: https://www.investopedia.com/ask/answers/difference-between-...

If a company raises $1mm on a $9mm pre-money valuation, the company is now worth $10mm ($9mm valuation + $1mm raised) and the extra shares correspond to the $1mm raised.

Onwership is diluted on a percentage basis, but the Series B and C investors didn't steal value from previous investors through dilution. There are more shares because there is more money in the company.

> If a company raises $1mm on a $9mm pre-money valuation, the company is now worth $10mm ($9mm valuation + $1mm raised) and the extra shares correspond to the $1mm raised.

No, the company is worth it's last share price x number of shares outstanding. A company is worth what the market will pay for it, not for what some bean counter guesses is the value.

Yes, they didn't "steal" value, they traded cash for present and future potential value.

That cash doesn't just get parked in a bank account (it gets spent) and the company valuation isn't static, it changes based on market perception all the time.

You are thinking in snapshot accounting terms and not in real market valuation terms. Dilution typically causes price per share to fall unless growth is outpacing the dilution significantly.

> Companies can't simply dilute away their shareholders like you're suggesting.

They absolutely can. When you buy shares, or exercise options, in an early stage company the documents clearly specify that the shares can be diluted, which is how it's on solid legal footing.

> EDIT: To clarify some misconceptions in the comments below: When a company sells more shares into the market they are not simply diluting away existing shareholders.

HAHHAHHAHHHAHAAAA come on man.

The scarcity is technically real, but practically pointless.

Every Bitcoin represents 100,000,000 tradable assets. If there are 30,000,000 Bitcoin in circulation that means there are 100,000,000x30,000,000 individual assets available to hold and trade. Do the math, and then realize that we’ll arrive at the heat death of the universe before Bitcoin is ever actually scarce.

Scarcity is about the rate of supply meeting demand. In most commodities, as demand increases, suppliers will move to increase supply to meet that demand. Even with gold (of which the earth has some unknown finite supply), the rate of which it is mined and extracted will increase as market price increases.

Bitcoin has a fixed supply, Bitcoin's daily rate of creation cannot be increased or decreased unless everyone agrees to it.

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