Paid In Capital

Well, first you start with the original $1,000 Grandma gave you, or rather, invested in you, to buy 10% of your lemonade business. And note that it’s very important for defining paid-in-capital that Grandma is buying a slice of your pie, representing 10% ownership of your company.

She’s not giving you a low interest rate loan. despite her career as a collection agent for the mob. So the thousand dollars is equity, aka ownership.

That capital is paid in, and it’s likely that, in order to build the 16,000 lemonade stand stores, you will need to attract other investors, who will then pay in more capital to own incremental percentages of you, as your own original 100% ownership of the business when you founded it gets diluted down to some much smaller number than the 90% you own after Grandma’s grand.

But things go well. And it turns out, amazingly, that you didn’t need to sell any more equity in your company.

You were able to grow by taking short-term loans, which you then paid off by charging $5 a cup for the absynthe kicker. It was a huge hit among third graders. So after four years, you found yourself with $196,000 in cash in your bank account.

Yes, you had $5,000 worth of cups in inventory, a bunch of sugar, and other things.

Yes, they are probably convertible quickly into cash, but if you converted them quickly, you would also suffer a massive discount in pricing, because semi-used cups, or at least ones that have been previously sold, even if they are in their original packaging, probably don’t sell for much on eBay.

So for your purposes in assessing your own capital surplus, you’re going to ignore inventory and all of the other elements, that in a big or real company you’d have to account for, or at least consider when you thought about how liquid your company was. And... that’s not a reference to the product you actually sell.

So of that $196,000, $195,000 of that cash was capital surplus, or just capital, aka cash that came in in the form of after-tax profits as you grew your company from a nothing to...a something.

Now that’s how you make the most of your, uh…seed money...