What is a Complex Capital Structure?

//What is a Complex Capital Structure?
What is a Complex Capital Structure? 2017-10-01T08:03:08+00:00

Definition: A complex capital structure refers to corporation that has outstanding dilutive securitiesincluding rights or options to purchase stock and convertible preferred stock or bonds. In other words, the capital structure is made up of common stockalong with many different securities that can increase the amount of common shares outstanding.

What Does Complex Capital Structure Mean?

This organization is considered a complex structure because the total number of common shares outstanding can be increased at any time without the direction of the board of directors. The most common example of dilutive securities is stock options paid to executives. Corporations traditionally compensate their executives with a combination of wages, bonuses, and options. Stock options allow the executive to purchase newly issued common shares for a set price during a set period of time. The executive officer can choose to exercise his options whenever he wants during the time period or not exercise them altogether.

Now assume the company has multiple employees paid with options as well as numerous convertible preferred shares and bonds outstanding. All of these dilutive securities can be cashed in and increase the outstanding common shares at any point without direction from the company itself.

Example

These securities allow the holders to increase their ownership percentage and decrease the average common shareholders’ ownership percentage at will. The larger the option or series of convertible bonds, the greater the fluctuation in the common shares will be when they are exercised. Since most large corporations have millions of shares, these securities rarely affect the ownership percentages in a material degree, but they can for smaller entities.

As you can see, this is much more complex of an organization than a corporation with a simple capital structure and no dilutive securities outstanding. The only way a corporation with a simple capital structure can increase common shares is to issue new ones to investors.