Capital Gain

Equity Term

Most equity investors look for their return on investment from capital gain, which is achieved by selling the equity at a price higher (“gain”) than what was paid for it (“capital”).  Technically speaking the capital gain would equal the selling price minus the cost basis of the investment.

Most of the time that sale of the equity is achieved by selling the entire company (and of course all of the equity in the company) to a large acquirer. Occasionally the capital gain can be achieved when the company becomes publicly traded in an IPO (initial public offering), and eventually the equity investors are allowed to sell their shares in the public market.

In the US, capital gains tax is much lower than regular income tax, if the asset being sold (like startup stock) has been held for more than a year between purchase and sale. That makes capital gains a more attractive way to generate income.

Don Gooding

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