What is a Complex Capital Structure?

A business has a complex capital structure when it has issued other types of equity than just common stock. A startup company commonly develops a complex capital structure over time, as it goes through multiple rounds of financing. This is typically done in order to entice additional investors to provide the firm with funding, based on their particular needs. If the business ever goes public, it cleans up this capital structure by converting its various classifications of stock into common stock. When a firm has a complex capital structure and is publicly held, it must report its fully diluted earnings per share.

Example of a Complex Capital Structure

A startup company is having a difficult time attracting investors, so it offers them Series A preferred stock that pays a 4% dividend, followed by Series B preferred stock that pays a 7% dividend, and then Series C preferred stock that has extra voting privileges. In addition, it has to offer its key employees stock options in order to convince them to work for the company at low salary levels. Finally, it must offer investors convertible bonds in order to keep the interest rate low, while giving them the option to convert their bond holdings into the company’s common stock, in case the firm’s value increases.