Q&A -  What is share capital

Share capital is the money invested in a company by the shareholders. Share capital is a long-term source of finance.

In return for their investment, shareholders gain a share of the ownership of the company.

An illustration of an example company share ownership structure is shown below:

Shareholders benefit from the protection offered by limited liability – they are only liable for the amount they invest in share capital rather than the overall debts of the company.

The founding entrepreneur (/s) is highly likely to invest in the share capital of the start-up. This is a common method of financing a start-up. Ideally the founder will try to provide all the share capital of the company, retaining 100% control over the business.

A key point to note is that the entrepreneur may use a variety of personal sources (e.g. cash, personal investments) to finance the purchase of shares.

Once the investment has been made, it is the company that owns the money provided.

The shareholder obtains a return on this investment through dividends (payments out of profits) and/or increases in the value of the company when it is eventually sold.

A start-up company can also raise finance by selling shares to external investors – this is typically to a business angel or venture capitalist (sometimes also called a private equity investor).