As an addendum: An example of capital structure. (Based on debt capital rather than equity capital, but just an example)<p>You and Fred have a common friend, Bob. Bob wants to start a new business and needs to borrow money.<p>First, Bob borrows $10,000 from Fred and later on, Bob borrows $20,000 from you.<p>Some months go by, and the business isn&#x27;t doing well; Bob (or rather, his company) eventually files for bankruptcy, listing $6,000 in assets. How should this remaining value be distributed among you and Fred, which both have a claim to it because of the debt owed to you?<p>One way to divide up the remaining amount would be in a <i>pro rata</i> method: Bob borrowed $30,000 total, 1&#x2F;3rd of which was from Fred and 2&#x2F;3rds of which was from you. So, you should get $4,000 and Fred should get $2,000. (This is known as <i>pari passu</i> I believe)<p>However, this isn&#x27;t the only way things could be done. One could say that because Fred lent money first, he should get <i>paid back in full</i> before you do. Or perhaps one could argue the opposite.<p>You could argue back and forth about what the most &quot;fair&quot; way to divide up the assets is, but in reality what matters is what the rules outlined in capital structure specify. They should define who gets paid out first, which debt is subordinate to other debt, etc. (And even then, it&#x27;s not always entirely clear, as evidenced by lengthy bankruptcy proceedings at large companies)