| When raising capital for a business venture, a | | | | • In liquidation, common stock holders are the |
| company can either raise debt capital, equity | | | | last priority to which to distribute assets |
| capital or a combination of the two. Debt capital is | | | | In venture capital transactions, there may be two |
| money loaned to the company at an agreed | | | | types of common stock which are issued. The |
| interest rate for a fixed time period. Conversely, | | | | first is Class A common stock, which is like |
| equity capital is money invested by owners | | | | preferred stock without the special voting rights |
| (shareholders) for use in business operations that | | | | which some statutes require in shares labeled |
| need not be repaid. Combinations include | | | | ""preferred."" A second type of common stock is |
| convertible securities which may be debt that can | | | | junior common stock. While this type of stock is |
| be converted into equity at some point in the | | | | not used very frequently, it allows companies to |
| future. | | | | get cheap stock into the hands of key employees |
| The simplest form of equity capital is common | | | | at minimal tax cost. |
| stock. Common stock has many distinguishing | | | | Determining what type of capital to raise and how |
| factors as follows: | | | | to structure the financing transaction is of critical |
| • Common stock is not convertible into | | | | importance to growing ventures. As such, it is |
| another type of security | | | | crucial to understand the key terms and consult |
| • Each share enjoys one vote | | | | the appropriate legal and business advisors when |
| • Dividends are payable without limit but only | | | | embarking on the capital-raising process. |
| when declared by the board of directors | | | | |