Bill Reichert, Managing Director at Garage Technology Ventures explains the two different types of equity financing; common stock and preferred equity.

Bill Reichert has over 20 years of experience as an entrepreneur and operating executive. Since joining Garage in 1998, Bill has focused on early-stage information technology and materials science companies. He has been a board director or board observer at CaseStack, WhiteHat Security, ClearFuels Technology, Simply Hired, MiaSole, D.light Design, ThermoCeramix, and VisaNow, among others.

Transcript:

What is equity financing?

In the venture world, we talk about equity financing. What do we mean by equity financing? Well, equity refers to shareholding in your company, so your equity is the ownership of your company. As distinct from debt. Debt is not ownership, debt is a liability against the assets of your company. So if you're an entrepreneur and you're embarking on building your company and you want to go out and raise venture capital. Most likely you're going to be raising equity capital. Most likely you're going to be selling an ownership stake in your company. Venture investors, they're looking for a good chunk of ownership in your company, so that when the company becomes wildly successful, then their stake in the company proportionately increases and that's what an equity investment gives you.

Now there are two main kinds of equity investment in a company. So, as a founder you own common equity, you own common shares in your company. Those common shares generally do not have a lot of special rights or privileges associated with them, but they do represent a proportional ownership of your company. Investors like to invest in preferred equity or preferred stock. Preferred stock is a form of equity that has preferences over the common and so investors they want to have an advantage over the common shareholders, over you, the founder. When they invest in the company, they want to be given special preferences. Those preferences are very complex and you can read about them elsewhere but the main thing you're going to want to know is this thing called a liquidation preference, which means that the investors they get their money back before you get your money back as a founder with common equity, so those are the main elements of equity financing.

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