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!