Why Do Companies Issue Stock?

The short answer, and the one most exam questions are looking for: a company issues stock to raise money it does not have to pay back. Everything else is a variation on that.

Unlike a loan, equity carries no interest, no repayment date and no covenant that can be breached. In exchange, the buyer gets a permanent claim on part of the company. That trade - cash now for a slice of everything later - is the whole of it.

The four real reasons

1. To fund the business without debt. A company that is not yet profitable cannot reliably service a loan. Equity has no schedule to miss, which is why almost every biotech, every pre-revenue technology company and every early-stage miner is equity-funded.
2. To fund growth that is bigger than cash flow. Building a factory, entering a market or running late-stage trials costs more than the current business generates. Stock turns future value into present cash.
3. To pay people. Options and restricted stock let a company compete for staff without spending cash, and align employees with the share price.
4. To buy other companies. Paying in stock keeps cash on the balance sheet and is often the only way a large acquisition happens at all.

There is a fifth reason that nobody advertises: to survive. When cash is running out and lenders have stopped answering, issuing stock is the only door left. It is the same mechanism as reason one, executed from a much worse negotiating position.

IPO versus everything after

An initial public offering is a company selling shares to the public for the first time. It gets the attention, but it is a single event. The far more common - and for existing shareholders, far more consequential - version is the secondary issuance: a company that is already listed selling more shares into the market it is already trading in. Those happen constantly, and they are what change your ownership percentage.

What it costs the people who already own it

Every new share divides the same company into more pieces. If a company doubles its share count, each existing share represents half as much of the business as it did before. That is dilution, and whether it is worth it comes down to one question: did the money buy something worth more than the ownership it cost?

Stock issued at a high price to fund a project that earns a return leaves everyone better off. Stock issued at a depressed price to pay this quarter's salaries does not - it converts existing shareholders' ownership into working capital. Both are "issuing stock to raise capital". They are not remotely the same event.

What issuing to survive looks like, at the time of writing

Below are companies that have told the SEC there is substantial doubt about their ability to continue as a going concern, ranked by how much their share count grew over the last reported year. This is reason five in practice. The figures come from their own filings and change as new ones land, so check the stamp before treating a row as current.

How to tell which kind you are holding

Three checks, all of them in the filings:

• Is the cash needed or opportunistic? Compare cash against annual burn - that is the cash runway. Under twelve months, the raise was not optional.
• At what price? An offering priced at a steep discount to the market tells you who had the leverage in the negotiation.
• How often? One raise funds a plan. A raise every second quarter funds existence.