Equity share capital

For you to know what equity share capital is, you will need to understand what equity shares are all about.

Starting a company is one thing, but growing a company successfully is another thing altogether. Each company needs substantial working capital to keep their business afloat in the beginning, and also to help it run smoothly once the business picks up. This capital would be important when the company comes across some financial challenges and would help keep its regular operations active. It’s also crucial when the company is thinking of expanding. This is where equity share capital comes into play.

Getting the needed capital in the early stages can be difficult, but with a great business idea and sound business plan, a company can use its equity share capital to gain funds from investors. They leverage their potential growth and future earnings of their company to get the necessary funding to help the company grow.

Not sure what equity share capital is? Here is all you need to know about it.

Equity Share Capital

For you to know what equity share capital is, you will need to understand what equity shares are all about. Equity shares or ordinary shares are those that represent the ownership stake in a company. They are the same as the shares sold by the company to get investment for growing the business. And the people who hold equity shares are the ones who hold a part of the ownership in the company.

By offering equity to shareholders, they also get the following benefits:

  • Control on management: The shareholders that have a large percentage of the shareholdings in the company can also influence company management to a large extent.
  • Profitability: Investors don’t just benefit from the capital appreciation of the shares, but also get to earn dividends regularly.
  • Fair liquidity: The share price is directly proportional to the company’s revenue generation or the market, or sometimes both.

What is share capital?

Equity share capital means property and money that the company gets through equity financing. It is crucial as it shows how much the company was able to earn with the help of its equity shares during a funding round. Simply put, equity share capital is the money that a company gets by issuing preferred or common stock. The amount of equity share capital that a company gets changes over time and even with additional public offerings.

Moreover, the term equity share capital can mean different things based on context. In fact, accountants have a much narrower definition based on the rules on the balance sheet of public companies. In short, equity share capital is the total amount raised by the company in sales of shares.

Let’s say there is a company that had an IPO six years ago and began to sell their equity shares to the public. Through this the company was able to raise about $1 million in capital for the business. And since then, the market value of the company has increased to $5 million. Nevertheless, since the company was only able to raise $1 million in equity financing six years ago, the balance sheet reflects that amount and not the $5 million. In fact, if the company issues new shares now for a value of $1 million, then the balance sheet would show $2 million.

Basically, the equity share capital does not deal with the market value of the company. So, it does not matter what the market value of the company is, the balance sheet of the company would show the amount that the company earned during the IPO. It only considers the issued price. This means that if a company issues 20,000 shares at $20, the capital of the company would be $400,000. After six years, the market price of the share can become $200, but the capital would still remain $400,000 until the company issues new shares.

How do you calculate share capital?

To get an equity share capital formula, there are a lot of formulas that you can consider. But remember that the par value is the minimum amount given by a shareholder for a share in the company. There is another definition called the paid-in capital, which is the amount in excess of the par value. Deducting the par value from the issue price provides the extra paid-in capital.

Formula 1: Equity share capital equals the issue price per share times the number of outstanding shares.

Formula 2: Equity share capital equals the number of shares times the par value of stock plus the paid-in capital in excess of par value.

Let us take an example where the company issues about 200,000 shares at a value of $10 per share, with a par value of $2 per share. The total capital of the company with this is $2 million (200,000 * $10 = 2,000,000), and the total par value is $400,000, which is obtained by multiplying $2 x 200,000 shares. According to the formula, the additional paid-in capital per share is $8, which is the difference between $10 minus $2. Now, the total additional paid-in capital is $8 * 200,000 shares, which equals $1,600,000. And like this, you will get the value of the equity share capital in the company.

Types of Equity Share Capital

As mentioned earlier, the term equity share capital is used to mean slightly different things based on the context in the company. And while discussing the amount of money that a company can legally raise by selling their shares, there are several types of equity share capital, as below:

  • Authorized share capital: During the time of registration, the Article of Incorporation states the number of authorized shares that the company has. These can be used to raise authorized share capital. The authorized share capital is also called the registered capital or normal capital. This is the maximum amount of share capital that the company can issue, but it can be increased later on when the company expands.
  • Issued share capital: Normally some of the authorized capital is issued to the public for subscription, which is known as the issued capital. This means that it is the nominal value of shares offered to the public for subscription. Just to be clear, the firm does not issue all its capital at the same time. So, the issued capital is usually less than the authorized capital in the company. If all the shares are issued, the authorized capital and the issued capital would be the same.
  • Unissued share capital: The excess of the authorized share capital that has not been issued yet is the unissued share capital.
  • Subscribed share capital: A part of the issued capital subscribed by the public is known as the subscribed capital. However this does not mean that all the shares that have been issued will be owned. So, the share capital of the number of shares owned by the public is called the subscribed capital, that is the portion of issued share capital paid to the shareholders.
  • Paid-up capital: This is the amount actually paid by the shareholders to the company.
  • Reserve capital: Reserve capital is the part of the uncalled capital of the company which can only be called in the event of its winding-up, which is only available for creditors at that time.

Equity Share Capital vs Preference Share Capital

From what we’ve discussed so far, we already know what equity share capital is, but what is preference share capital? Preference share capital means the shares with preference over other equity capital in the company. This just means that preference share capital has more preference in repayments and dividends at the time the company is being diluted or liquified.

For instance, let’s say there is a company which has an equity share capital of $60 million, being 3 million shares of $20 each. And the preference share capital of the company is $6 million, being 300,000 shares of $20 each. In this case, the preference shareholders would have preferred rights over equity of the company.

Here is a table to show in detail the difference of equity share capital vs preference share capital:

BasisEquity SharesPreference Shares
DefineThis is the main capital of the company. These shares promise the holder a preference over the equity shares of the company.
TypesThere are no types for these shares. This is why the equity shares are considered to be the ordinary stock of the company.There are a lot of types like participatory, non-participatory, cumulative, non-cumulative, convertible, non-convertible, and others.
DividendIt is not mandatory to issue dividends for these shares. With these shares, they are entitled to dividends.
Rate of DividendThe dividend rate for these shares fluctuates. These shares have a predefined rate of dividend.
VotingShareholders get voting rights in general meetings with these shares.The shareholders do not get any voting rights.
LiquidationOnce the repayment has been done for preference shares, the equity shareholders get paid during a liquidation event.These shareholders have the right to be paid first after all the creditors have been paid during a liquidation event.
Compulsory RepaymentIt is not mandatory to repay anything to investors with these shares. This share is compulsorily repayable to their investors.
Compulsory to issueThis type of equity share capital has to be issued by every company. It is not required to issue preference share capital.
Participation in managementThe equity shareholders are the main ones responsible for the management of the company.These shareholders do not have the rights to participate in the management of the company.
ConversionCannot be converted into preference shares. These can be converted into equity shares.
DenominationThey are normally of smaller denomination, which is also why small investors can invest in it.They are of high denomination, which means that medium and large investors can afford to invest in preference share capital.
Bonus SharesShareholders can get a bonus issue against their existing holding.Shareholders cannot get a bonus issue against their existing holdings.
TradableTradable in the market through a stock exchange.Not tradable in the market.

Issue and Manage Company Equity on Eqvista

With this clear, the next step for you is to begin tracking all of your equity share investments. The best way to do this is by using a cap table software like Eqvista. All you need to do is create an account for FREE, add shareholders, and issue shares to them electronically using the app. From there, you can easily manage and track all the equity share capital of your company.

Interested in issuing & managing shares?

If you want to start issuing and managing shares, Try out our Eqvista App, it is free and all online!