Considering Stock Types When Creating Business Plans

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  • 0:03 Financing Opportunities
  • 1:17 Common Stock
  • 2:39 Preferred Stock
  • 3:11 Stock Warrants and Options
  • 3:59 Regulations in Issuing Stock
  • 4:49 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define a business plan and explore different types of stock. You'll learn about advantages and disadvantages of each, and we'll also discuss an important piece of securities legislation, Regulation D.

Financing Opportunities

Mr. Wesley, a science teacher, accidentally created a widget that enables electronic cars to travel more miles than the current technology. As a result, he's received orders from every United States car manufacturer. But before he can fulfill the orders, he needs sufficient capital or financing to rent a manufacturing warehouse, buy supplies, and pay for labor and other expenses. Mr. Wesley creates a corporation (a legal business entity), then starts working on a business plan to submit to the bank along with his application.

A business plan is a roadmap of the company's products or services and goals, and the methods for achieving this plan. A business plan also includes a financial component outlining the corporation's prospective sales, expenses, and financing. Banks require that new companies show sufficient start-up capital and income cash flow to maintain ongoing operations. Mr. Wesley contacts his brother, Fernando, an accountant, to assist him with this part of the business plan. Fernando explains two financing options exist: debt and equity. Debt includes obtaining a loan or issuing bonds, while equity focuses on issuing stock. Let's take a closer look at their discussion on equity.

Common Stock

An initial public offering (or IPO) represents the first offering of stock to investors. Stock is a share or percentage owned in a corporation. When investors purchase stock, the corporation receives cash to fund or finance operations. Common stock represents one type of stock ownership. In return for the investment, common stockholders receive voting rights. For each share owned by a common stockholder, he or she receives one vote on major corporate decisions. However, explains Fernando, corporations give up 100% decision making to these stockholders. Mr. Wesley asks that as chief financial officer, can't he make a final decision? Fernando says, 'No, the common stockholders have the authority if they own the majority of the shares.'

There is a solution, though, to ensure a certain class of stockholders (the more business savvy investors) retain the majority vote by offering two different classes of common stock: class A and class B. For example, class A investors may receive 10 votes per share, while class B investors receive 1 vote per share.

Another benefit of issuing common stock is that shareholders are not guaranteed dividends. Dividends are monies paid to the investors from profits. In summary, the common stockholders' main benefits are voting rights and a hopeful increase in the stock price when they sell the stock, also called capital gains. Now let's move on to the preferred stockholders.

Preferred Stock

Fernando shares with Mr. Wesley that while dividends are not guaranteed with common stockholders, they are with preferred stockholders. Preferred stockholders also receive priority over common stockholders in the event the business becomes insolvent and liquidates. However, one main advantage exists for the corporation with preferred stockholders - they have no voting rights, meaning the corporate executives maintain 100% control. Mr. Wesley smiles at this news since he really wants to personally drive the success of his business.

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