Every business can use a little more money, whether it’s a small startup or large corporation. To move to the next stage, founders often raise money from investors. But these investors don’t simply hand over money out of the goodness of their hearts. They agree to give sometimes hundreds of thousands of dollars in exchange for equity in the company – a share in the company's ownership.
Equity share capital refers to the portion of the company's money which is raised in exchange for a share of ownership in the company.
Equity Shares Meaning
A business’s capital structure generally has both equity and debt. Debt is the amount of capital that has to be repaid, such as a bank loan. Equity, on the other hand, does not have to be repaid. It is the amount of money that investors put into a company in return for a share of the company's ownership. When the business makes money, some of the profit is then distributed to those shareholders as a return on their investment. Initially, the business founder is likely to provide all the capital of the start-up in return for 100 percent of the company's shares. A start-up can also raise capital by selling equity to external investors such as business angels.
Equity Versus Preference Shares
Shares of stock in a company fall into two categories: preference share capital and ordinary share capital. When an investor talks about "equity shares," she's usually referring to ordinary shares. Preference shareholders are paid first in the event of a bankruptcy and receive a fixed dividend per share. However, general equity shareholders have voting rights, while preference shareholders do not.
Types of Equity Shares
In the world of investing, nothing is ever simple. So it’s no surprise that there are multiple types of equity shares. Three types are authorized share capital, subscribed share capital and issued share capital. Authorized share refers to the maximum amount of capital a company can issue to shareholders, usually as stated in a business’s articles of incorporation. Subscribed share capital refers to the amount to which the shareholder has “subscribed” or asked to receive. Issued capital is the share capital that has been issued to a company’s shareholders.
On the Budget Sheet
Now that you know what equity shares mean to investors and businesses, it’s important to know where they fall on the balance sheet. On your balance sheet, it’s important to include both your issued capital and subscribed capital, since these are the shares that have been earmarked. If shares have been issued to shareholders, you should also list the details of each issue, which will help you track this information.
Calculating the Value
Even if your equity capital has not been issued to shareholders, it should be included on your equity sheet. These funds represent a risk to your business, since it is technically a debt your business will owe. To calculate the value of the equity shareholders have in your business, estimate the market value of your company’s assets, subtracting any liabilities. You can then list it on your balance sheet as stockholders’ equity.