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The Use of Common Stock in Venture Capital
Transactions
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by:
Dave Lavinsky
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When raising capital for a business venture,
a company can either raise debt capital, equity capital or a
combination of the two. Debt capital is money loaned to the company at
an agreed interest rate for a fixed time period. Conversely, equity
capital is money invested by owners (shareholders) for use in business
operations that need not be repaid. Combinations include convertible
securities which may be debt that can be converted into equity at some
point in the future.
The simplest form of equity capital is common stock. Common stock has
many distinguishing factors as follows:
• Common stock is not convertible into another type of
security
• Each share enjoys one vote
• Dividends are payable without limit but only when declared
by the board of directors
• In liquidation, common stock holders are the last priority
to which to distribute assets
In venture capital transactions, there may be two types of common stock
which are issued. The first is Class A common stock, which is like
preferred stock without the special voting rights which some statutes
require in shares labeled ""preferred."" A second type of common stock
is junior common stock. While this type of stock is not used very
frequently, it allows companies to get cheap stock into the hands of
key employees at minimal tax cost.
Determining what type of capital to raise and how to structure the
financing transaction is of critical importance to growing ventures. As
such, it is crucial to understand the key terms and consult the
appropriate legal and business advisors when embarking on the
capital-raising process.
About the author:
GT Business
Plans has developed over 200 business plans for clients that
have collectively raised over $750 million in financing, launched
numerous new product and service lines and gained competitive advantage
and market share. GT Business Plans is the sister site of GT Venture Capital
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