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potentially valuable opportunity to raise relatively risk…free money。 It is riskfree
to the business but risky； sometimes extremely so； to anyone investing。
Essentially this type of capital； known collectively as equity； consists of the
issued share capital and reserves of various kinds。 It represents the amount
of money that shareholders have invested directly into the pany by
buying shares； together with retained profits that belong to shareholders
but which the pany uses as additional capital。 As with debt； equity
es in a number of different forms with differing rights and privileges。
Ordinary shares form the bulk of the shares issued by most panies
and are the shares that carry the ordinary risks associated with being in
business。 All the profits of the business； including past retained profits；
belong to the ordinary shareholders once any preference share dividends
have been deducted。 Ordinary shares have no fixed rate of dividend； indeed
over half the panies listed on US stock markets pay no or virtually
no dividend。 These include high…growth panies such as Google and
Microso。。； which argue that by retaining and reinvesting all their profits
they can create be。。er value for shareholders than by distributing dividends。
A pany does not have to issue all its share capital at once。 The total
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amount it is authorized to issue must be shown somewhere in the accounts；
but only the issued share capital is counted in the balance sheet。 Although
shares can be partly paid； this is a rare occurrence。
Preference shares get their name for two reasons。 First； they receive their
fixed rate of dividend before ordinary shareholders。 Second； in the event of
a winding up of the pany； any funds remaining go to repay preference
share capital before any ordinary share capital。 In a forced liquidation this
may be of li。。le fort； as shareholders of any type e last in the queue
a。。er all other claims from creditors have been met。
Class A and Class B shares are cases where categories of shareholder
are singled out for more or less favourable treatment。 For example； class
A shares are o。。en given up to five votes per share； while class B gets one。
In extreme cases class B shareholders can get no votes at all。 panies
will o。。en try to disguise the disadvantages associated with owning shares
with fewer voting rights by naming those shares。 One of the most famous
examples was their use by the Savoy Hotel Group to ward off an unwanted
takeover by Trusthouse Forte。 While Trusthouse was able to buy 70 per cent
of Savoy shares on the open market； they could secure only 42 per cent of
the voting rights as they were only able to buy class B shares； the A shares
being in the hands of the Savoy family and allies。
Reserves； a typically misleading term in all accounting； means profits
of various kinds that have been retained in the pany as extra capital。
Also important is what the term reserves does not mean。 It does not mean
actual money held back in reserve in bank accounts or elsewhere。 Reserves
e from retained profits over many years but are reinvested in buildings；
equipment； stocks or pany debts； just like any other source of capital；
and are rarely held in cash。
The main categories of reserves are as follows：
。 Profit and loss account； ie cumulative retained profits from ordinary
trading activities。
。 Revaluation reserves； being the paper…profit that can arise if certain
assets are revalued to current price levels without the assets concerned
being sold。
。 Share premium account； ie the excess over the original par value of a
share when new shares are offered for sale at an enhanced price。 Only
the original par value is ever shown as issued share capital。
SOURCES OF EQUITY CAPITAL
There are two broad sources of equity： private equity； usually put in by
individuals or small groups of individuals who for hopefully the prospects
of greater returns will take on greater risks； or public capital through a
share issue on a stock market。
62 The Thirty…Day MBA
Private equity
There are three main sources of private equity： business angels； venture
capital firms and corporate venture funding。
Business angels
One likely first source of equity or risk capital will be a private individual
with his or her own funds； and perhaps some knowledge of your type of
business。 In return for a share in the business； such investors will put in
money at their own risk。 They have been christened ‘business angels’； a
term first coined to describe private wealthy individuals who back a play
on Broadway or in London’s West End。
Most angels are determined upon some involvement beyond merely
signing a cheque and may hope to play a part in your business in some way。
They are hoping for big rewards – one angel who backed Sage with ￡10；000
in its first round of ￡250；000 financing saw his stake rise to ￡40 million。
These angels frequently operate through managed networks； usually
on the internet。 In the UK and the United States there are hundreds of
networks； with tens of thousands of business angels prepared to put up
several billion pounds each year into new or small businesses。
Finding a business angel
The British Business Angels Association （bbaa。uk） has an online
directory of UK business angels。 The European Business Angels Network
（eban） has directories of national business angel associations both inside
and outside of Europe at （eban 》 Members） from which you can
find individual business angels。
Venture capital
Venture capital （VC） providers are investing other people’s money； o。。en
from pension funds。 They have a different agenda from that of business
angels； and are more likely to be interested in investing more money for a
larger stake。
In general； VCs expect their investment to have paid off within seven
years； but they are hardened realists。 Two in every 10 investments they
make are total write…offs； and six perform averagely well at best。 So； the one
star in every 10 investments they make has to cover a lot of duds。 VCs have
a target rate of return of 30 per cent plus； to cover this poor hit rate。
Raising venture capital is not a cheap option and deals are not quick to
arrange either。 Six months is not unusual； and over a year has been known。
Every VC has a deal done in six weeks in its portfolio； but that truly is the
exception。
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Finding venture capital
The British Venture Capital Association （bvca。uk） and the European
Venture Capital Association （evca） both have online
directories giving details of hundreds of venture capital providers。 The
Australian Government （austradeict。gov。au/Globl…VC…directory/
default。aspx） has a global venture capital directory on this website and the
National Venture Capital Association in the United States has directories
of international venture capital associations both inside and outside the
United States （nvca 》 Resources）。
You can see how those negotiating with or receiving venture capital rate
the firm in question at The Funded website （thefunded） in terms
of the deal offered； the firm’s apparent pet