Hamilton, pp. 382-383: Debt and Equity Capital

 

You need money to run a business!  This money is called capital.  You can borrow it, you can get contributions from owners of the business, you can get money from outside investors or you can reinvest your business’s earnings back into the business to make it grow.

 

There’s a key difference between equity capital and debt.  Debt is something that you borrow and pay interest on.  You have to repay it eventually.  Equity capital is an ownership interest that is valued by the market price of a piece of property minus the debts against that property.  Some securities may be somewhat of a combination of both.  Debt claims are also known as “fixed claims” and equity claims are also known as “residual claims”.  This chapter focuses on raising capital through the sale of equity capital.

 

Don’t forget, when a business sells equity capital they are subject to lots of statutes like the Securities Exchange Act and state “blue sky laws”!  So watch out!

 

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