For all those investors betting on new companies and getting equity for their investments:
Investors today are making one of the quintessential and most often repeated mistakes of all time…
Equity only has value if there’s something left over for investors after all those other commitments are met.
That excess is cash profit.
Equity only has value if a company earns a profit.
Equity gets its value from whatever is left over after a company pays everybody else.
Equity investors are the least senior and riskiest claim on a corporation’s assets and earnings.
When a company liquidates, equity holders are the last to get paid, after (in order of seniority) secured creditors, unpaid wage earners, taxes, trade creditors, unsecured debt holders, subordinated unsecured debt holders, and preferred stockholders (if any).
Even if the company never liquidates, all those people must be paid before equity holders can get dividends.