Small and close corporations are usually started through informal agreements among a few men who are personally acquainted with each other. Each one of these men subscribes to a certain amount of stock of the new corporation and pays for his stock either in cash or by turning over property at a value agreed upon with his associates in the enterprise. With comparatively few exceptions, corporations of this type issue their bonds and capital stock at a par value exactly or nearly equivalent to the cash or cash value which the corporation receives. Thus at the beginning there is an actual correspondence between the capitalization, the investment, and the actual net worth of the corporation's assets. If the enterprise operates along well established lines, has the correct amount of capital, and earns a normal rate of return, there will be little divergence from this system of approximate equality among the three factors mentioned. Ordinarily, however, the vicissitudes of business soon bring about variations. With a larger corporation there is usually no very close correspondence, even at the beginning. It has been remarked: "New companies nearly always start with a burden on their backs. Either they have to spend a great deal in order to get their capital, or they pay a great deal for the good-will of an established business."*

The wide discrepancy that may exist between investment and actual value is most forcibly illustrated by the history of the so-called "Cordage combination" which began as the National Cordage Company in 1887, became after the first reorganization in 1893 the United States Cordage Company, and after the second reorganization in 1895 the Standard Rope and Twine Company. Arthur F. Dewing has calculated the results to the original investors in this unfortunate enterprise as follows:

For purposes of illustration consider a private investor having bought ten shares of the National Cordage Company's preferred stock of Belmont & Co. in 1890. In the reorganization of the National Company he was compelled to buy twenty per cent more of the preferred stock, all of his holdings becoming second preferred. He would, therefore, come into possession of twelve shares of the United States Cordage Company's second preferred stock - cost $1,200. He received no dividends. In the reorganization of the United States Cordage Company, the second preferred stock was assessed $10 a share and received $10 a share of the First Mortgage Bonds of the Standard Rope and Twine Company and forty per cent of stock. The investor in question would be assessed $120 - making his actual investment $1,320. He received $120 in the Standard Rope and Twine Bonds and $480 in stock. In the reorganization of the latter Company the stock was extinguished. The bonds were worth thirty-nine per cent and, if retained, would be subject to an assessment. The $120 in bonds represented an actual value to the investor of $46.80. Meanwhile, he would have lost the interest on the investment for upwards of twelve years. Taking this at the rate of five per cent the indirect loss amounted to $780. A man who invested $1,000 in the first and underlying security of the National Cordage Company would, in 1905, have increased his actual investment to $1,320, and including interest to $2,100. For this he would have stock that was worthless and bonds having a market value of $46.80 and subject to further assessment.*

* Hartley Withers on "Stocks and Shares," p. 74.

On the other side may be given numerous examples of corporations the fortunate stockholders in which have seen the market value of their shares rise with great rapidity. It needs no further argument to satisfy every one that however closely investment, capitalization, and net worth may correspond at the beginning of an enterprise, they are likely to diverge more and more as time goes on.