Complex Capital Structure

What Is Complex Capital Structure?

The use of different forms of securities, rather than relying solely on one class of common stock. A company with a complex capital structure might have a combination of several different varieties of common stock classes — each carrying different voting privileges and dividend rates.

For example, a company with a complex capital structure might use both Class A and Class B common stock and preferred stock, as well as both callable bonds and non-callable bonds.

How Complex Capital Structure Works

Many companies issue different classes of securities as a means of attracting a wider variety of investors, who have differing needs and temperaments. Furthermore, the diversification of common stock types allows companies to approach market conditions with greater flexibility than those strictly offering single common stock options.

Some companies offer rounds of financing that incorporate caps, performance warrants, accrued dividends, and other valuation complexities.

Each different class of securities that a complex capital structure offers, comes with a unique set of economic circumstances and control rights. Notably, investors who hold preferred stocks tend to have greater voting rights than common stockholders.

In any case, the assorted securities offered by complex capital structures are often referred to as “dilutive securities” because their dissemination often contributes to a reduction in reduces a company’s earnings per share (EPS). The level of decline is highly dependent on the percentage of dilution, on a case-by-case.

Perks of Complex Securities

Complex securities are not restricted solely to outside investors. In fact, the most typical examples of dilutive securities are stock options paid to executives, who corporations traditionally compensate with a combination of bonuses, wages, and stock options, which enable executives to purchase newly-issued common stock shares for a set price, during a set period of time.

An executive may exercise their option whenever they choose, during the given time period allowed, or they may decline to exercise an option altogether. The board of directors and the current common shareholders have no authority to decide if and when this happens.

Finally, an organization considered to be a complex capital structure are entitled to augment their total number of common shares, at any time, without the approval or direction of the board of directors. This is unlike companies with simple capital structures, which may only increase the number of common shares by decree of the board of directors.