It takes money to make money. That is a common saying in the business world. An entrepreneur can have a great idea and has the courage to take his or her idea to fruition forming a company. Unless the person is independently wealthy they will need money to fund the upstart of the company and then to keep the company running until profits start to come in. Most startups have their initial money come directly from the owners and is the first paid-in capital the company gets. When a company goes public then money from the stocks sold adds more into the paid-in capital. When the company starts earning profits and chooses not to distribute dividends on some of the money being made then it is equity, through earned capital.
Why is it important to keep paid-in capital separate from earned capital?

These are two completely different earnings and have different sources. Paid-in capital represents funds from the owners and from stockholders from the sale of stocks while earned capital represents the net profit the company is earning. These two should be kept separate so that it is clear where the capital came from. It would be untruth full to show on financial statements (specifically the balance sheet) that equity is say earned capital when perhaps it is all paid-in capital. This specific information can mislead investors and creditors.

As an investor, is paid-in capital or earned capital more important? Explain why.

As an investor knowing both; paid-in capital and