This always annoys me

The 33-year-old founder of In The Style, an online fast fashion website, is in line for a bumper payday as it explores a £100m stock market listing.

Adam Frisby, who set up the retailer in 2013, currently owns 40pc of the firm. He is understood to be seeking to sell a small proportion of his shares in the float, likely becoming a millionaire in the process.

No.

Today he owns 40% of something worth £100 million. He’s a millionaire.

After the float he will own less than 40% of something worth £100 million and have some cash equal to the 40% minus x% of £100 million.

Yes, clearly, the float might increase the value of the company – liquidity – and all that. But it’s still clearly and obviously true that the swap – cash for shares – doesn’t make him a millionaire. It might crystallise it, recognise it, whatever, but the swap of one asset for another doesn’t make it.

10 thoughts on “This always annoys me”

  1. I see your point Tim, but in these days of crazy paper valuations, I wouldn’t consider myself a millionaire until there was cold hard cash in my account.

  2. I’d agree with MC. Until there is a market for the company shares giving a real market value then arguably the paper valuation is meaningless. If I hold a cheque of one million pounds payable to me that doesn’t automatically make me a millionaire (if people think it does I’m happy to send out such cheques after a small cover charge). Most people would only consider me to be a millionaire if either a) the cheque has been cashed and cleared (‘show me the money’) or possibly b) the payer and authenticity of the cheque is extremely credible (National Lottery, NS&I etc).

    Until the market proves otherwise, I’m going to keep assuming the company is potentially worth nothing – all it takes is a PR disaster, technology collapse, law suit, trendy well financed competitor or bad accounts to potentially wipe away the valuation overnight

  3. But it’s still clearly and obviously true that the swap – cash for shares – doesn’t make him a millionaire. It might crystallise it, recognise it, whatever, but the swap of one asset for another doesn’t make it.

    Mr and Mrs Green might advise otherwise.

  4. Tim is correct. The man owns a valuable asset even if it is privately held and illiquid. All comments about how some disaster or bad business decision could wipe that out are all true, but those are just risk factors that probably make the company less valuable as a private one than as a listed one. Business appraisers will commonly use a discount factor, often on the order of 30-40%, when comparing a private firm to a lihpsted one, so you could say that upon becoming public the shares coul be worth almost twice as much, but that doesn’t change that the ownership of a successful private company is already valuable. No one suggests that the Koch brothers aren’t rich because their firm is private.

  5. No, people agree that the Koch brothers are rich based on the evidence of the significant disposable income they are actively spending, the fact that they each own 42% of a company getting $110 billion of revenue, the fact they are (presumably I’ve not checked) getting significant salaries and/or dividends from the company, and the fact that in 1983 they/the company paid $620 million for 21% of the shares.

    I’d even happily agree that on academically on paper he may already be considered a millionaire, but in common usage ‘being a millionaire’ generally is interpreted as ‘having a millionaire lifestyle’ which is to do with being able to spend like a millionaire through having liquid assets.

    Or to give another example, a farmer could be heavily in debt and loosing money but own a worn out unproductive field perhaps worth 50k. If a local development plan indicates a housing estate could be built on it the field may shoot up in value to 1 million. On paper he is now a millionaire, but to the farmer his lifestyle isn’t going to change, he still isn’t getting any more income and still may be on the edge of bankruptcy. He either needs to find a buyer willing to take the risk, have an investment n time and money on the hope he can get planning permission.

  6. Yes, there needs to be a different verb used. Isn’t “realised” what is supposed to describe it? Fred Bloggs realised the million-pound value of his company, or something.

  7. I think you’d be surprised at the number of millionaires who don’t really live a “millionaire lifestyle” and how many people who do live a millionaire lifestyle, at least for a while, aren’t. I’ve read that the large majority of luxury cars are leased and not owned.

    Many valuable assets don’t spit off an income – your farmer’s field comes to mind, but also perhaps jewelry, fine art, etc., but wealth is defined more by assets than income. Tim is right. The guy is already a milliionaire, just as your farmer may have suddenly become one.

  8. I’ve read that the large majority of luxury cars are leased and not owned.

    Presumably following the “if it flies, floats or fucks” principle.

  9. Surely the key question is: “How much does it pay in dividends?”

    Everything else is just detail.

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