The information below provides a brief overview of Equity Securities.
- Companies raise capital in the form of either equity or debt.
- Equity represents an ownership interest in a for-profit company where the Net Equity Value of the company (i.e. total assets less indebtedness) and any ongoing profits are owned proportionately by the holders of the equity. Equity Securities are a form of permanent Capital for a company.
- Debt, on the other hand, represents temporarily borrowed funds by a company and, in return for borrowing capital, the Issuer must meet specific obligations under the terms of the debt for the periodic payment of interest and the scheduled repayment of the borrowed funds (Principal).
- U.S. companies are incorporated at the state level into C or S Corporations which issue shares or, in the form of a Limited Liability Corporation, which allocates Membership Interests (sometimes also expressed in the form of Units).
- Equity shares or membership Interests can be in either common or preferred form, whose rights are defined in the company’s Articles of Incorporation, if the company is a C or S Corporation, or in the company’s Operating Agreement, if the company is a Limited Liability Company.
- If a company is sold or must be liquidated, debt obligations are Senior in liquidation priority (i.e. repayment) to equity Securities. If all the debt obligations are not fully satisfied when a company’s assets are sold through liquidation, equity holders will receive nothing.
- Preferred equity is Senior in liquidation to common equity. Preferred equity typically will have specific preferred dividend payment obligations, as well as other preferred return on investment-related obligations, which are in “preference” to common equity.
- Preferred equity is often the form of equity issued through Private Placement Offerings by Venture-stage companies (i.e. pre-cash flow) or as part of a strategic plan by more mature companies needing expansion capital or acquisition finance.
For some background on private debt, please read “Debt Investment Overview.”