Definition
The term sources of equity refers to capital funds provided by the owners of a company. For large corporations, this includes both paid in capital as well as retained earnings. The sources of equity available to small businesses or startup companies include angel investors as well as venture capital.
Explanation
Companies can raise capital in one of two ways. They can issue bonds or obtain a loan, in which case the source of capital is debt. Alternatively, companies can use shareholder monies. This includes both the original investments made by the owners of the company, known as paid-in capital, as well as the company's retained earnings:
Paid-In Capital: the aggregate amount of money provided by all shareholders, typically the result of issuing stock.
Retained Earnings: the portion of net income that is retained by a company rather than distributed back to the owners in the form of dividends.
Smaller businesses, or startup companies that have not yet issued common stock, can raise equity via angel investors or venture capital firms:
Angel Investors: wealthy individuals that may be willing to invest as much as $1 million of their own money in a startup or a growing business. According to startup statistics, $100 Billion worth of capital was poured into 98 new European startups.
Venture Capital Firms: a pool of investors' money, usually limited to opportunities in excess of $1 million.
Where practicable, companies prefer to use equity to raise capital, since the use of debt increases the financial leverage of the business. The excess use of leverage increases the fixed costs of a company (interest expense); thereby increasing the risk it may not be able to meet all of its financial obligations.
Related Terms
paid-in capital, retained earnings, owners equity
