1. Sources of Equity Financing
For sole proprietorships or partnerships
Owner or owners invest money in the business
Venture capital
For corporations
Sale of stock
Use of profits not distributed to owners
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2. Sources of Equity Financing (cont’d)
Selling stock
Initial public offering
When a corporation sells common stock to the general public for the first time
Advantages of selling stock
Firm does not have to repay money received from sale of stock
Firm does not have to pay dividends to stockholders
Two types of stock
Common stock
Preferred stock
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3. Sources of Equity Financing (cont’d)
Selling stock (cont’d)
Common stock
Stock whose owners may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others
Preferred stock
Stock whose owners usually do not have voting rights, but whose claims on dividends and assets are paid before those of common-stock owners
Par value
An assigned (and often arbitrary) dollar value printed on a stock certificate
Convertible preferred stock
Preferred stock that the owner may exchange for a specified number of shares of common stock
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4. Sources of Equity Financing (cont’d)
Retained earnings
The portion of a corporation’s profits not distributed to stockholders
Venture capital
Money invested in a firm with the expectation that the firm has the potential to become very successful and increase in value
Investors usually receive an equity position in the business and share in its profits
Private Placement
Stocks and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors
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