In this post we discuss the use of different kinds of shares in raising capital for your business idea. Enjoy
These are issued to equity investors during either public or private offerings. They form the backbone of a company’s financial structure and represent the risk capital of the company. There is no fixed dividend to ordinary shareholders of the company, however a dividend is distributed if profits remain after lenders and preference shareholders have been paid. Ordinary shares can impact financing flexibility through decisions to withhold capital for expansion and growth if need be. Zimbabwean banks used this method during the financial crisis from 2004-2005 they passed the need for dividend distribution, resulting in capital preservation.
Ordinary shareholders have limited loss liability based on their equity holdings. They do exercise control over the company through voting rights and the power to elect or remove directors. The potential returns to these shareholders are unlimited, depending only on the growth of the company.
Preference shares offer lower risk because they have a fixed rate of dividend per year if there is sufficient profit. They are paid prior to ordinary shares. Cumulative preference shares provide the shareholder the right to receive dividends in arrears for the years that were not profitable. Non-cumulative preference shares do not accumulate. Participating preference shares enable the investor to receive further portions of profits after receiving the fixed rate due to their preference shares when ordinary shareholders have received their dividend. Redeemable preference shares allow the venture to buy back its shares from the investors at some agreed future date. Being low risk investments, these carry a lower dividend as compared to non-redeemable shares. Both Kingdom and Royal Banks used these at some point in their financing strategy. With time Kingdom abandoned the strategy, citing the significant constraints and control issues that arise out of preference shares. This is because Kingdom executives seem keen on maintaining control.
These are long term loans evidenced by a trust deed. They are divided into units and investors are invited to purchase as many units as they may require. The debenture loan may be redeemable or irredeemable. The investor receives interest from the loan.
Debentures and other forms of long term loans may be convertible into the venture’s shares. From an investor’s perspective this hedges against risk when investing in start ups.