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Sources of Capital

Introduction

Several relevant sources of capital are available to a startup in order to meet the company's needs in its various phases. Sources of financing are classified primarily into equity (usually in the form of shares), which is capital invested in the company in consideration for part of the ownership and debt. Many financial instruments are constructed from a combination of the two, such as convertible debentures, which combine debt and options for equity.

There is a direct link between perceived risks and required returns; the risk, the higher is the rate of return expected by investors. The risk incorporated in receiving equity in consideration for an investment is higher than the risk involved in debt (debentures), since shareholders receive only the residual claim, whereas debenture holders have a superior, contractual claim to principal and interest. The younger the company, the greater is the resemblance of any debt it issues to equity, since its debt offers no much better security for a return on the investment.


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