Once the decision has been made to pursue equity financing, the next step is to determine the type of shares to be sold. In an equity financing to raise capital, a company can sell common stock, preferred stock, or a combination of the two. It is vital for the issuing company to fully comprehend the properties of common and preferred shares in order to structure the offering so that it raises the needed capital while putting the business in the best position possible to achieve its objectives.
Common and preferred shares share some of the same characteristics including:
- Both may trade publicly or privately
- Both may be purchased by either individual or institutional investors
- As long as certain requirements are met, purchasers can borrow against both types of shares in a margin account
The differences between common and preferred shares include:
- Common shares represent ownership in the issuing company while preferred shares typically do not
- Common shares normally carry voting rights for shareholders while preferred shares do not
- Preferred shares typically pay a pre-determined interest rate while common shares do not. The issuing company may decide to issue regular payments to common shareholders but these payments are referred to as dividends.
- A company can issue common shares whether it is generating revenues or not. Companies that are generating revenues and are either approaching profitability or are already profitable most often issue preferred shares.
- Purchasers of common shares are typically forward-looking and buy shares based on the prospect of future growth. Because preferred shares are usually bought for their interest payments, purchasers typically focus more on present day financials and the issuing company’s ability to make regular payments.
Equity financing can be accomplished using either common or preferred shares but deciding on the right type of equity offering can make a big difference. As structured by the team led by Dmitrij Harder at Solvo Group, equity financing can raise needed capital while giving a company the best chance for long term success.