ShmoopTube

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finance a la shmoop what are paid in capital and capital surplus all right

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well first you start with the original thousand bucks grandma gave you or [Someone taking a check]

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rather invested in you and that's an important difference to buy 10 percent

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of your lemonade business and note the import therefore defining paid in

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capital that grandma is buying a slice of your lemonade stand pie representing [Piece of the pie chart is highlighted]

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10 percent ownership of your company thousand bucks for ten percent she's not

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giving you a low interest rate loan despite her career as a collection agent [Grandma holding a rolling pin and threatening someone]

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for the mob so the thousand dollars is equity aka

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ownership that capital is paid in and it's likely that in order to build the

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16,000 lemonade stand stores that you dream of you will need to attract other [Lots of lemonade stands appearing]

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investors who will then pay in more capital to own incremental percentages [Investors handing over cash for equity]

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of your business as your own original hundred percent ownership when you

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founded it it's diluted down to a sum much smaller number than the 90 percent [The kids piece of the pie chart gets smaller]

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you own after Grandmama's grand but things go well and it turns out

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amazingly that you didn't need to sell anymore equity in your company you were

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able to grow by taking short-term loans which you then paid off by charging five [Lemonade stand taking loans from a brokerage, investors and a bank]

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bucks a cup for the Absinthe kicker it was a huge hit among third graders so [Kid looking tired]

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after four years you found yourself with a hundred ninety six thousand dollars in

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cash in your lemonade stand bank account yes you had five grand worth of cups in [ATM showing the balance]

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inventory a bunch of sugar and some other things yes they are probably

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convertible quickly into cash but if you converted them quickly you would also [Liquid stamp]

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suffer a massive discount in pricing because while semi used cups or at least

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ones that have previously been sold even if they're in their original packaging

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while they probably don't do well on eBay so for your purposes in assessing [Cups for sale on eBay]

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your own capital surplus here you're going to ignore inventory and all of the

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other elements that in a big or real company well you'd have to account for [Inventory items being crossed out]

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at least consider when you thought about how liquid your company was and yes [Kid thinking of lots of cash floating on the sea]

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that's not a reference to the product you actually sell so of that hundred

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ninety six thousand dollars well one hundred ninety five grand of that

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cash was capital surplus or just capital aka cash that came in the form of [Capital surplus calculation]

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after-tax profits that you kept in your company as you grew it from a nothing to

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something now that's how you make the most of your seed money [A hole being dug and seeds being planted]

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