Accounting Dictionary

Equity Financing

Equity financing means getting the money to start or run my business by selling stock, selling ownership interests in my company.

Let’s say I need $100,000 to start my business, but I only have $40,000. I could sell $60,000 worth of the company’s common stock which would leave investors owning $60,000/ $100,000 or 60% of the company. If I made $300,000 worth of profit, 60% of that or $180,000 would be sent to the investors. Let’s say I wanted to use the $300,000 to open a second store, the investors could stop me. They own 60% of the voting stock of the company so they have the right to dictate management policies. (In fact, Steven Jobs sold more than 50% of Apple computers and the investors fired him. Fired him from the company he started in his garage because he no longer had controlling interest (over 50%) of the stock.) On the other side, if I made no profit I am under no legal obligation to send money to the investors. I can’t be sued for not paying the investors; in that case they just made a bad investment.

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