Equity Financing: Types and Sources

The Capital Stack

Every company finances its assets with a mix of debt and equity, ranked by priority of repayment and risk:

The lower you go in the stack, the lower the risk and the lower the required return (since repayment priority comes first). The higher you go, the higher the risk — and equity always sits at the top: the last to be paid if the company is liquidated, which is exactly why the cost of equity is always the most expensive form of financing (as you saw in the previous lesson).

Types of shares

Type	Liquidation claim	Dividend claim
Preferred Shares	Higher priority than common shares	Higher priority in distributions, often at a fixed rate
Common Shares	Last claim in liquidation	Last claim on distributions

Sources of equity

Source	Market	Example
Founders	Private	Personal capital at company formation
Venture Capital	Private	Funding startups or early-growth-stage companies
Private Equity	Private	Investing in larger, more mature companies
Retail investors	Public	Buying shares through the stock exchange
Institutional investors	Public	Pension funds, investment banks, insurance companies

Venture Capital funds vs. Leveraged Buyout (LBO) funds

Private equity funds typically split into two very different strategies:

	Venture Capital (VC) Funds	Leveraged Buyout (LBO) Funds
Investment stage	Early-stage or expanding businesses with limited access to other financing	Larger, already-mature businesses
Approach	Usually minority stakes, without heavy leverage	Controlling stake, with substantial leverage (debt) to maximize equity returns
Relative size	Typically smaller funds	Typically much larger funds

An important note: this financing choice isn’t random — notice how VC funds specifically target companies in the startup and early-growth stages from the business life cycle lesson, while LBO funds target mature companies able to bear significant debt thanks to their stable cash flows.

Next up: the other side of the capital stack — the types and sources of debt.