How does an investor make money?


An investor is any person who decides to allocate part of his savings to a financial or non-financial asset to increase its value or at least not to lose economic value due to inflation or currency depreciation.  

Investing in shares is an alternative which, depending on the company, may involve acquiring shares listed on a stock market such as the stock exchange or, on the other hand, shares in an unlisted company. In both cases, the investor will eventually earn money through two ways: (a) the dividends distributed by the company and (b) the capital gain from the sale of his shares. 

When an investor decides to buy a company partially or entirely, he is looking for both sources of profit, although the capital gain from the sale of his shares is limited by the fact that the shares of non-listed company are illiquid. It is therefore common for an investor to have professional advisors assisting him in the analysis, evaluation and formalisation of a shareholding, whether it is a total or partial purchase of a company. 

Professional advisors will always suggest the formalisation of the acquisition of a company’s shares together with a shareholders’ agreement including clauses that provide liquidity to the investment, such as: (1) the drag-along clause and (2) the tag-along clause.  

What you should know about the partner agreement

(1) The Drag-along clause gives the investor a drag-along right over the other shareholders in order to reach a percentage of the shares being transferred (sold) that gives the new buyer a dominant position, i.e. corporate control.  

(2) The Tag-along clause gives all the shareholders of a company a tag-along right in the partial sale of a company so that they all benefit proportionally in the event of an attractive takeover bid which does not reach the totality of the issued shares. 


Invest in the Startup ecosystem

Normally, in start-up financing rounds, entrepreneurs are reticent to grant drag-along rights to a financial and minority shareholder, as they try to maintain corporate control of their company until they consider it is the right time to sell, which may not coincide with the expectations of a financial investor. However, it is a fundamental right to provide liquidity to the acquisition of a corporate shareholding when we are dealing with the acquisition of a minority percentage of the capital of a company that is not listed on a stock exchange and therefore in which the investor is a prisoner of the shareholders who have the aforementioned corporate control. 

The entrepreneur must be aware that the capital provided by a financial partner is as vital to the development of the company as the know-how he possesses. One without the other can make the potential business not to be materialised. Furthermore, the entrepreneur must consider that the financial partner is not interested in replacing him, as his interest lies in maximising his economic investment, and any new investor will value his management capacity and business vision. It is in the business knowledge and managerial qualities to lead a company where its strength lies and which guarantees its permanence and profitability. 

Entrepreneurs must consider as a vital aspect in order to attract investors that they can multiply their investment by many times, as these are highly volatile investments, i.e. risky, and to do so they must “align” their interests with these, i.e. they must coincide with their profit priorities based on the revaluation of the company and therefore of its shares, above their remuneration (salary) and bonuses or incentives for performance.