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The Use of Common Stock in Venture Capital Transactions
When raising capital for a business venture, a company can either raise debt capital, equity capital or a combination of the two. Debt capital is money loaned to the company at an agreed interest rate for a fixed time period. Conversely, equity capital is money invested by owners (shareholders) for use in business operations that need not be repaid. Combinations include convertible securities which may be debt that can be converted into equity at some point in the future. The simplest form of equity capital is common stock. Common stock has many distinguishing factors as follows: - Common stock is not convertible into another type of security - Each share enjoys one vote - Dividends are payable without limit but only when declared by the board of directors - In liquidation, common stock holders are the last priority to which to distribute assets In venture capital transactions, there may be two types of common stock which are issued. The first is Class A common stock, which is like preferred stock without the special voting rights which some statutes require in shares labeled "preferred." A second type of common stock is junior common stock. While this type of stock is not used very frequently, it allows companies to get cheap stock into the hands of key employees at minimal tax cost. Determining what type of capital to raise and how to structure the financing transaction is of critical importance to growing ventures. As such, it is crucial to understand the key terms and consult the appropriate legal and business advisors when embarking on the capital-raising process. Since its inception, GT Business Plans has developed over 200 business plans. Growthink clients have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. Growthink has become the firm of choice for venture capital firms, angel investors, corporations and entrepreneurs in the know. For more information please visit http://www.growthink.com or download our free Business Plan Guide.
Other Articles in This Category: Starting Your Business By The BookNear-death Experience is the Mother of Invention for Two Dallas Electricians Coating Service Business Case Study The Entrepreneurial Difference Find Me the Expert on This! Getting Rich Isnt a Bad Idea An Entrepreneur and a Life To Be Remembered Which Niche To Conquer? Corporate Espionage in Franchising Cut to the Quick - What is an Entrepreneur? The Inside Story Expand Your Resourcefullness! What Qualities Do Franchisors Need? Achievements Outweigh Education and Experience Do You Have What It Takes To Be An Entrepreneur? Securing Second and Third-round Venture Capital Financing Self-Esteem and the Entrepreneur |
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