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What Is Equity Financing?

How equity financing works, types of equity financing.

• Equity vs. Debt Financing

Reasons to Choose Equity Financing

Pros and cons of equity financing, example of equity financing, special considerations.

• Equity Financing FAQs

The Bottom Line

• Small Business
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Equity Financing: What It Is, How It Works, Pros and Cons

Equity financing is the process of raising capital through the sale of shares. Companies raise money because they might have a short-term need to pay bills or need funds for a long-term project that promotes growth. By selling shares, a business effectively sells ownership of its company in return for cash.

Equity financing comes from a variety of sources. For example, an entrepreneur's friends and family, professional investors, or an initial public offering (IPO) may provide needed capital.

An IPO is a process that private companies undergo to offer shares of their business to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. Industry giants, such as Google and Meta (formerly Facebook), raised billions in capital through IPOs.

While the term equity financing refers to the financing of public companies listed on an exchange, the term also applies to private company financing.

Key Takeaways

• Equity financing is used when companies need cash.
• It is typical for businesses to use equity financing several times as they become mature companies.
• There are two methods of equity financing: the private placement of stock with investors and public stock offerings.
• Equity financing differs from debt financing: the first involves selling a portion of equity in a company, while the latter involves borrowing money .
• National and local governments closely monitor equity financing to ensure it's done according to regulations.

Equity financing involves the sale of common stock and other equity or quasi-equity instruments such as preferred stock, convertible preferred stock, and equity units that include common shares and warrants. This action can affect existing shareholders and impact the ability to reach new shareholders.

A startup that grows into a successful company will have several rounds of equity financing as it evolves. Since a startup typically attracts different types of investors at various stages of its evolution, it may use other equity instruments for its financing needs.

For example, angel investors and venture capitalists—generally the first investors in a startup—favor convertible preferred shares rather than common stock in exchange for funding new companies because the former have more significant upside potential and some downside protection.

Once a company has grown large enough to consider going public, it may consider selling common stock to institutional and retail investors.

Later, if the company needs additional capital, it may choose secondary equity financing options, such as a rights offering or an offering of equity units that includes warrants as a sweetener.

Equity financing is distinct from debt financing. With debt financing, a company assumes a loan and pays back the loan over time with interest. Equity financing involves selling ownership shares in return for funds.

Individual Investors

These are often friends, family members, and colleagues of business owners. Individual investors usually have less money to invest, so more are needed to reach financing goals. These investors may have no relevant industry experience, business skills, or guidance to contribute to a business.

Angel Investors

Often, these are wealthy individuals or groups interested in funding businesses they believe will provide attractive returns. Angel investors can invest substantial amounts and provide needed insight, connections, and advice due to their industry experience. Typically, angels invest in the early stage of a business's development.

Venture Capitalists

Venture capitalists are individuals or firms capable of making substantial investments in businesses that they view as having very high and rapid growth potential, competitive advantages, and solid prospects for success. They usually demand a noteworthy share of ownership in a business for their financial investment, resources, and connections. In fact, they may insist on significant involvement in managing a company's planning, operations, and daily activities to protect their investment. Venture capitalists typically get involved early and exit at the IPO stage, where they can reap enormous profits.

Initial Public Offerings

A more well-established business can raise funds through IPOs , selling company stock shares to the public. Due to the expense, time, and effort that IPOs require, this type of equity financing occurs in a later stage of development after the company has grown. Investors in IPOs expect less control than venture capitalists and angel investors.

Crowdfunding

Crowdfunding involves individual investors investing small amounts via an online platform (such as Kickstarter, Indiegogo, and Crowdfundr) to help a company reach particular financial goals. Such investors often share a common belief in the company's mission and goals.

Equity Financing vs. Debt Financing

Businesses typically have two options for financing when they want to raise capital for business needs: equity financing and debt financing . Debt financing involves borrowing money. Equity financing involves selling a portion of equity in the company. While there are distinct advantages to both types of financing, most companies use a combination of equity and debt financing.

No Ownership Issues With Debt

The most common form of debt financing is a loan. Unlike equity financing, which carries no repayment obligation , debt financing requires a company to pay back the money it receives, plus interest. However, an advantage of a loan (and debt financing, in general) is that it does not require a company to give up a portion of its ownership to shareholders.

With debt financing, the lender has no control over the business's operations. Once you pay back the loan, your relationship with the lender ends. Companies that elect to raise capital by selling stock to investors must share their profits and consult with these investors when they make decisions that impact the entire company.

Operational and Expense Differences

Debt financing can also restrict a company's operations, limiting its ability to take advantage of opportunities outside of its core business. In general, companies want a relatively low debt-to-equity ratio. Creditors look more favorably on such a metric and may allow additional debt financing in the future if a pressing need arises.

Finally, interest paid on loans is tax deductible as a business expense. Loan payments make forecasting for future expenses easy because the amount does not fluctuate.

Factors to Consider

When deciding whether to seek debt or equity financing, companies usually consider these three factors:

• What source of funding is most easily accessible for the company?
• What is the company's cash flow ?
• How important is it for principal owners to maintain complete control of the company?

If a company has given investors a percentage of their company through the sale of equity, the only way to remove them (and their stake in the business) is to repurchase their shares, a process called a buy-out. However, repurchasing the shares will likely cost more than you received when you issued them.

You're a Startup

Businesses in their early stages can be of particular interest to angel investors and venture capitalists. That's because of the high return potential they may see due to their experience and skills.

Established Lending Sources Ignore You

Equity financing is a solution when established financing methods aren't available due to the nature of the business. For example, traditional lenders such as banks often won't extend loans to companies they consider too significant a risk because of an owner's lack of business experience or an unproven business concept.

You Don't Want to Incur Debt

With equity financing, you don't add to your existing debt load and don't have a payment obligation. Investors assume the risk of investment loss.

You Get Guidance From Experts

Equity financing delivers more than money. Depending on the source of the funds, you may also receive and benefit from the valuable resources, guidance, skills, and experience of investors who want you to succeed.

Your Goal Is the Sale of Your Company

Equity financing can raise the substantial capital you may need to promote rapid and greater growth, making your company attractive to buyers and a sale possible.

While equity financing has benefits, there are some disadvantages to being funded this way.

No obligation to repay the money

No additional financial burden on the company

Large investors can provide a wealth of business expertise, resources, guidance, and contacts

You have to give investors an ownership percentage of your company

You have to share your profits with investors

You give up some control over your company

It may be more expensive than borrowing

Pros Explained

Equity financing results in no debt that must be repaid. It's also an option if your business can't obtain a loan. It's seen as a lower risk financing option because investors seek a return on their investment rather than the repayment of a loan. Plus, investors typically are more interested in helping you succeed than lenders are because the rewards can be substantial.

Equity financing offered by angel investors and venture capitalists can provide access to outstanding business expertise, insight, and advice. It can also provide you with new and vital business contacts and networks that may lead to additional funding.

Cons Explained

The stakes taken by investors providing equity financing can be significant, and thus, profits going to the business owners are reduced. Even small common stock investors get a share of the profits. Moreover, investors may want to be consulted whenever you plan to make decisions that will impact the company.

In exchange for the large amounts that angel investors and venture capitalists may invest, business owners must give over some percentage of ownership. That can translate to having less control over your own company.

The typically higher rate of return demanded by large investors can easily exceed that lenders charge. Also, shareholder dividends aren't tax deductible. Interest payments on loans are, with some exceptions.

Say that you've started a small tech company with your own capital of $1.5 million. At this stage, you have 100% ownership and control. Due to the industry that you're in and a fresh social media concept, your company attracts the interest of various investors, including angel investors and venture capitalists.

You're aware that you'll need additional funds to keep up a rapid pace of growth, so you decide to consider an outside investor. After meeting with a few and discussing your company's plans, goals, and financial needs with each, you decide to accept the $500,000 offered by an angel investor who you feel brings enough expertise to the table in addition to the funding. The amount is enough for this round of funding. Plus, you don't wish to relinquish a greater percentage of your company ownership by taking a larger amount.

Thus, the total invested in your company is now $2 million ($1.5 million + $500,000). The angel investor owns a 25% stake ($500,000/$2 million), and you maintain a 75% stake.

The equity-financing process is governed by rules imposed by a local or national securities authority in most jurisdictions. Such regulation is primarily designed to protect the investing public from unscrupulous operators who may raise funds from unsuspecting investors and disappear with the financing proceeds.

Equity financing is thus often accompanied by an offering memorandum or prospectus, which contains extensive information that should help the investor make an informed decision on the merits of the financing. The memorandum or prospectus will state the company's activities, give information on its officers and directors, discuss how the financing proceeds will be used, outline the risk factors, and have financial statements.

Investor appetite for equity financing depends significantly on the state of the financial markets in general and equity markets in particular. While a steady pace of equity financing indicates investor confidence, a torrent of financing may indicate excessive optimism and a looming market top.

For example, IPOs by dot-coms and technology companies reached record levels in the late 1990s, before the "tech wreck" that engulfed the Nasdaq from 2000 to 2002.

The pace of equity financing typically drops off sharply after a sustained market correction due to investor risk aversion during such periods.

How Does Equity Financing Work?

Equity financing involves selling a portion of a company's equity in return for capital. By selling shares, owners effectively sell ownership of their company in return for cash.

What Are the Different Types of Equity Financing?

Companies use two primary methods to obtain equity financing: the private placement of stock with investors or venture capital firms and public stock offerings. It is more common for young companies and startups to choose private placement because it is more straightforward.

Is Equity Financing Better Than Debt?

The most important benefit of equity financing is that the money does not need to be repaid. However, the cost of equity is often higher than the cost of debt.

Companies often require outside investment to maintain their operations and invest in future growth. Any smart business strategy will include a consideration of the balance of debt and equity financing that is the most cost-effective.

Equity financing can come from various sources. Regardless of the source, the greatest advantage of equity financing is that it carries no repayment obligation and provides extra capital that a company can use to expand its operations.

Google. " Form 10-K ."

Meta. " Facebook Annual Report 2012 ," Page 93.

Internal Revenue Service. " Publication 535 (2022), Business Expenses ."

Arvin Ghosh. " The IPO Phenomenon in the 1990s ."

Yahoo Finance. " NASDAQ Composite (^IXIC) ."

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What Is Equity Financing — and Is It Right for Your Business?

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Equity financing trades a percentage of a business’s equity, or ownership, in exchange for funding. Equity financing can come from an individual investor, a firm or even groups of investors.

Unlike traditional debt financing, you don’t repay funding you receive from investors; rather, their investment is repaid by their ownership stake in the growing value of your company. Equity financing is a common type of financing for startup businesses — especially for pre-revenue startups that don’t qualify for traditional loans — and businesses that want to avoid taking out small-business loans .

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What is equity in business?

Business equity refers to the amount of ownership in a company or business, usually calculated as a percentage or by number of shares. For smaller private companies, equity is usually reserved for owners, investors and sometimes employees, while larger, publicly traded companies may also sell equity on the stock market.

Business equity is calculated by subtracting a business’s total liabilities from its total assets. For that reason, equity reflects a business’s value and indicates to shareholders the business’s overall financial stability.

» MORE: What is an equity injection?

How does equity financing work?

The process of getting equity financing will vary depending on the type of equity financing you’re looking for, your business and your investors. Generally, you can expect to follow these steps.

Gather documents

Before you start looking for investors, you’ll need documents like a business plan and financial reports , plus an idea of how much capital you need and what you will use it for. These are all things you’ll need to outline to a potential investor in your business pitch.

Find investors

If you don’t know investors or have potential investors in mind already, consider leveraging your personal or professional network to understand your options. You can also use online platforms to search for investors, or even check LinkedIn or attend local networking events.

Negotiate how much equity to give to your investors

Once you’ve found your investors, they may conduct their own business valuation, whereby they determine the potential value of your business to decide how much equity they want for their investment. Factors like business stage, amount of risk based on market trends and expected return based on financial projections will influence this negotiation. Angel investors may request 20-25% for example, while venture capitalists may want up to 40%.

Once you’ve negotiated a price, the cash you receive from investors may be used for product development, new hires, debt refinance or working capital.

Share profits

Once your business starts making money, your investors will be entitled to a portion of your profits depending on how much equity they have in your business. This percentage will be paid to your investors in dividends within a predetermined time frame. If your business fails to make money, original investments do not have to be repaid.

» MORE: Debt vs. equity financing

Pros and cons of equity financing

No repayment terms. Strictly speaking, you don’t “repay” an investor in your company the way you would a lender. Instead, the initial investment is repaid by the prospect of the future value and profits of your business. While loans can be a great way to fund your business, not having monthly or weekly payments can be very beneficial to startups or businesses that are focused on growth. 

Access to advisors. Most investors have invested before, and have likely even run their own businesses, which can make them a good resource as you navigate the ups and downs of running your business. Plus, because they have money invested in your business, your investors will have a special interest in helping your business succeed. 

Larger funding amounts. You may qualify for larger amounts of financing with equity investors than with debt financing, especially if you’re a startup business. In addition, if you end up needing more money along the way, an investor may provide additional injections. 

Alternative qualification requirements. Rather than business revenue or personal credit, investors will typically look at things like your business idea’s potential and your character.  

Loss of ownership. Any time you receive an equity investment, your percentage of ownership in the business will decrease, which can affect your share of any future profits and value. 

Loss of control. When you hand over ownership, you may also be handing over some control of your business, which can become problematic if you and your investors don’t see eye to eye. 

Usually for high-growth, high-potential businesses. Equity financing is usually tailored for fast-growing businesses with high growth potential, which means many small businesses won’t be the right fit for this type of financing. 

Common types of equity financing

Angel investing.

Angel investors are high-net-worth individuals, most often accredited, who invest their own money in startups or early-stage operating businesses. It is possible to find angel investors through platforms like the Angel Capital Association or AngelList, but they can also be personal acquaintances or members of your professional network. Angel investors are a good option for business pitches or pre-revenue startups because they are often experienced individuals who can provide guidance in addition to funding.

Venture capital

Venture capital (VC) is a type of equity financing that’s similar to angel investing, but instead of wealthy individuals, VCs are usually investing on behalf of a venture capital firm. In general, VC can be a little more difficult to qualify for, and firms usually get involved after angel investors have already made initial investments. VC may be best fit for early-stage, high-growth businesses that have started operating already.

Equity crowdfunding

Equity crowdfunding is a form of equity financing that draws on groups of online investors, some accredited and some not, to fund businesses. Crowdfunding platforms allow potential investors to learn about businesses or business pitches through online profiles created by the business owners. Some may find less pressure in raising capital on crowdfunding platforms, which may make equity crowdfunding a good option for less experienced entrepreneurs or smaller businesses. However, online investing poses additional risk of fraud, so you want to be diligent about the platform you use. In addition, issuing more shares, however small, may dilute your ownership and increase costs more than using an angel investor or VC.

Alternatives to equity financing

Small-business loans. Small-business loans are a common type of debt financing, and a fair alternative to equity financing. Loans can be either term loans or lines of credit , and may come from banks, online lenders, credit unions or nonprofit lenders like community development financial institutions (CDFIs).  

Small-business grants. If you want to avoid taking on debt and keep control of your business, and you don’t need a ton of funding, consider looking for small-business grants instead. Grants can be tricky to find and usually don’t fund in large amounts, but they can be worth it for funding that you don’t need to pay back. 

Self-investing. Tapping into your own savings can be a way to maintain full ownership of your business and avoid paying any interest. However, you risk losing your savings if your business fails, so it’s best to seek the advice of a financial professional to determine whether this option is right for you. 

Friends and family. If you have friends or family members you trust and who support you and your business, they may be willing to provide funding. Though this may feel less formal than receiving funding from a bank or other financial institution, you should still create a contract that details the terms of the business loan from your friends or family .  

» MORE: How to fund your business idea

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How Equity Financing Works: A Complete Guide For Beginners

Equity financing is raising capital for a business by selling ownership shares to investors. This means that individuals or entities invest money in a company in exchange for a percentage of ownership. Unlike loans, this form of financing does not incur debt or require regular repayments.

What Is Equity Financing for Startups and Businesses

Equity financing is especially crucial for startups and growing businesses. It provides an injection of capital that can be used for research and development, hiring skilled employees, marketing, and other essential operations. Additionally, equity investors often bring valuable industry expertise and networks, which can significantly contribute to the success of the business.

Equity Finance Example: Imagine a tech startup, XYZ Innovations, looking to develop groundbreaking software. They decide to seek equity financing, offering potential investors a share in the company in exchange for the capital needed to develop and market their product.

Understanding Equity Financing

Differentiating equity from debt is essential. Equity represents ownership in a company, whereas debt involves borrowing money that must be repaid with interest. Equity investors share in the company’s successes and challenges, and their returns are directly tied to the company’s performance.

Types of Equity

1. common stock.

Common stock represents basic ownership in a company. It typically grants voting rights, allowing shareholders to participate in key decisions.

2. Preferred Stock

Preferred stockholders have certain privileges over common shareholders. They often receive fixed dividends and have priority in case of liquidation.

3. Convertible Preferred Stock

This type of equity allows investors to convert their preferred shares into common shares at a later date, often at a predetermined conversion ratio.

4. Equity Shares in Limited Liability Companies (LLCs)

In LLCs, ownership units are called membership interests. These provide a share of the company’s profits and a say in its management.

Parties Involved

1. investors.

Investors provide the capital needed by the business in exchange for ownership shares. They can be individuals, venture capital firms, angel investors, or private equity groups.

2. Entrepreneurs/Founders

The entrepreneurs or founders are the individuals who establish and operate the business. They are the original owners and often retain a significant portion of equity.

Why Choose Equity Financing

1. no repayment obligations.

With equity financing, there is no obligation to make regular repayments, unlike loans. This allows the business to allocate funds towards growth and operations rather than servicing debt.

2. Access to Expertise and Networks

Equity investors often bring valuable industry knowledge, experience, and connections. This can open doors to new opportunities, partnerships, and markets that may have been inaccessible.

3. Shared Risk

Since equity investors become partial owners, they share in the business risks. If the company faces challenges or setbacks, they bear some losses alongside the founders.

Disadvantages

1. dilution of ownership.

As more equity is issued, the founders’ ownership stake in the company decreases. This is known as dilution. While it brings in much-needed capital, it also means relinquishing a degree of control over the business.

2. Loss of Control

Equity investors may have a say in major decisions, potentially impacting the founders’ ability to make unilateral choices about the company’s direction.

3. Sharing Profits

Profits are distributed among all shareholders, which means founders might not receive the full share of the company’s success.

The Equity Financing Process

Preparing for equity financing, 1. building a strong business plan.

Before seeking equity financing, it’s crucial to have a comprehensive business plan. This plan should outline the company’s mission, target market, competition analysis, financial projections, and growth strategy. A well-prepared business plan instills confidence in potential investors and serves as a roadmap for the business.

2. Valuing Your Company

Determining the value of your company is a critical step in equity financing. This valuation is typically based on revenue, profitability, market potential, and comparable company valuations. It’s essential to strike a balance between a fair valuation that attracts investors and one that doesn’t undervalue your company.

Finding Investors

1. angel investors.

Angel investors are typically affluent individuals who invest their capital into startups in exchange for equity. They often have industry experience and can provide valuable mentorship.

2. Venture Capitalists

Venture capitalists are professional investment firms that manage pooled funds from various investors. They actively seek out startups with high growth potential and provide capital, expertise, and guidance.

3. Private Equity Firms

Private equity firms invest in more established businesses and often take a more active role in management. They seek to enhance the company’s value and eventually exit with a profit.

Pitching to Investors

1. crafting a compelling pitch.

A pitch should concisely convey the business opportunity, the problem it solves, the market size, the competitive advantage, and the potential return on investment. It’s essential to be clear, concise, and persuasive.

2. Addressing Investor Concerns

Investors will have questions and concerns. It’s important to be prepared to address these, whether they pertain to market validation, scalability, competitive landscape, or financial projections.

Due Diligence

Before committing capital, investors conduct due diligence to thoroughly assess the company’s financials, market potential, team capabilities, and legal standing. This is critical to ensure the investment aligns with their risk tolerance and objectives.

Negotiating Terms

1. valuation.

Negotiating the valuation of the company is a pivotal aspect of equity financing. Both parties need to agree on a fair valuation that reflects the company’s current worth and future potential.

2. Equity Stake

The equity stake offered to investors determines their ownership share in the company. This can range from a small percentage for angel investors to a significant share for venture capital firms.

3. Investor Rights

Negotiating investor rights involves determining what privileges and protections the investors will have. This may include voting rights, information rights, and anti-dilution provisions.

Closing the Deal

Legal procedures, 1. drafting the term sheet.

A term sheet is a preliminary agreement outlining the key terms and conditions of the equity investment. It covers the investment amount, equity stake, investor rights, and specific provisions or milestones. This document serves as a basis for the final investment agreement.

2. Finalizing the Investment Agreement

The investment agreement is the legally binding document that formalizes the equity investment. It includes detailed terms, conditions, and protections for the company and the investors. Legal professionals are typically involved in drafting and reviewing this document.

Transferring Equity

Issuing shares to investors is the process of transferring equity ownership in exchange for the agreed-upon investment amount. This is when investors officially become shareholders of the company.

Post-Investment Phase

Reporting and communication.

After the investment, keeping investors informed about the company’s progress is essential. Regular reports and updates on financial performance, milestones achieved, and challenges faced help maintain transparency and trust.

Investor Relations

Building and maintaining positive relationships with investors is crucial. This involves not only providing updates but also seeking their input and feedback. Strong investor relations can lead to continued support and potential future investments.

Managing Equity

1. handling dilution.

Dilution occurs when new equity is issued, decreasing the ownership percentage of existing shareholders, including founders and early investors. Managing dilution effectively requires careful planning and communication.

2. Handling Exits or Buybacks

At some point, investors may seek an exit to realize their returns. This can happen through various mechanisms, such as selling their shares in a secondary market or the company going public (IPO). Alternatively, the company may buy back shares from investors under specific conditions.

Exit Strategies

Initial public offering (ipo).

An IPO is when a private company becomes publicly traded by offering its shares on a stock exchange. This provides an exit strategy for investors, including founders and early equity investors.

Acquisition

The acquisition involves selling the company to a larger entity. This can be a strategic move to leverage the acquiring company’s resources and reach.

Secondary Sale

In some cases, investors can sell their equity shares to other investors in secondary markets or through private sales. This provides liquidity without the company needing to go public or be acquired.

Understanding how equity financing works is essential for entrepreneurs and startups seeking to raise capital for their ventures. It offers a valuable alternative to traditional loans, providing access to funding while bringing in expertise and support from investors. However, weighing the advantages and disadvantages is crucial, considering factors like dilution of ownership and loss of control.

Equity financing involves careful planning, effective communication, and legal procedures. From preparing a strong business plan to negotiating terms with investors, each step is critical in securing the necessary funding.

After closing the deal, maintaining strong investor relations and effectively managing equity is key to long-term success. This includes reporting on progress, handling dilution, and addressing potential exits or buybacks.

Ultimately, clearly understanding the equity financing process empowers entrepreneurs to make informed decisions about their funding options and positions their businesses for growth and success.

Also Read: How Financial Forecasting Can Help Your Business Grow

The Ultimate Guide to Equity Financing

Table of contents

With stock markets trading close to record highs, now is a good time for companies to consider equity financing, even if they’re not publicly listed.

The average trading multiple on the S&P 500 is currently above 34, near the highest level it has been in a decade. All things being equal, that means that investors, on average, are overpaying for equity investments.

On the flip side, this represents a massive opportunity for companies looking to raise funds through equity financing.

Equity financing has many parallels to debt financing , although tends to bring more complications for the company raising funds in the long-term.

DealRoom regularly works with these companies, many of which are using equity to fund large M&A transactions. Our research indicates that of the 10 largest industry transactions (i.e. not involving private equity) in this decade, all involved some form of equity financing.

Hence, equity financing is of paramount importance to M&A. This is the DealRoom overview of the process.

What is Equity Financing?

Equity financing is the process through which capital is raised through the sale or exchange of shares. When capital is raised through the sale of shares, it implies that a third party acquires a pre-agreed amount of shares in the business in exchange for cash.

When there is an exchange of equity, as is the case with many M&A transactions, the third party accepts equity in the company in lieu of cash for their own company’s equity.

In both cases, the company is relinquishing some control in the company to the third party through the equity financing.

Types of Equity Financing

There are only two types of equity financing: Public and Private .

• Public equity financing: this includes initial public offerings, stock issues, and the sale of company held equity on the stock market. Publicly listed stock tends to be highly liquid, so even if it isn’t accepted as part payment in a transaction, the company could potentially sell equity that it holds to raise the required cash.
• Private equity financing: sometimes called a private placement, this is essentially the same as public equity financing with one major difference: the stock isn’t listed on a public exchange. That means that it is less liquid, but also faces less of the regulations that surround public equity listings.

Sources of Equity Financing

Having defined equity financing, the question then becomes:

‘Who would be interested in acquiring equity in my company?’

Even investors that claim to be industry agnostic often possess some restrictions about the kind of companies they invest in.

When these companies list the criteria that they’re looking for in investments on their websites, essentially what they’re doing is defining the criteria of the equity - as most will usually acquire part of the equity, rather than the whole business.

The following are the main sources of equity finance:

• Seed Capital Investors: Seed capital investors can range from incubation programs to private equity firms, and essentially refer to anybody that is willing to invest in a very early (often pre-revenue) stage company. 
• Venture Capital Firms: Venture capital is early stage private equity.  These investors usually seek high growth businesses, and accept higher risk in exchange for larger slices of equity. There is usually an experience imbalance (with the investors being more experienced in management than the company owners), so the equity investment will often have several stipulations around company management and strategy.
• Private Equity : Private equity has moved into the foreground in equity investing over the past two decades, with some estimates suggesting that industry will manage close to $6 trillion in assets by 2025 - 25% growth in just four years. The universe of private equity companies is now so large that, whatever your company’s size, there is likely to be a private equity company with the potential to provide equity financing.
• Crowdfunding : Crowdfunding received a major boost in 2012 with the passing of the JOBS Act, which aimed to encourage funding of small businesses in the United States by easing securities regulations. Now, companies can raise equity financing through a host of crowdfunding platforms, usually with a much broader base of investors (i.e., a crowd of investors) than more traditional forms of equity financing.
• Stock Market : As mentioned in the previous section, if your company has the relative luxury of being publicly listed, it can use its equity to raise financing on the public markets. Alternatively, if your company is private, if it meets certain criteria, it may be able to list on a public market through an IPO. Consider also a SPAC transaction (insert link), which have become widely popular in recent times.

Debt Financing vs. Equity Financing

When measuring whether your company should opt for debt or equity financing, there are a number of factors to consider.

As always, bear in mind that the comparisons made here are generalities and the specifics will depend on the prevailing market, your company, and the third parties involved in providing the finance.

This said, here are the main issues that you should consider when deciding which to choose for your company: 

Debt financing means that your company has to repay cash according to the terms agreed at the time of its issuing. If your company is unable to generate the cash required for repayment, this can become burdensome very quickly.

By contrast, equity financing just means that the provider of funds receives a share of the company and its profits.

And while this may seem more attractive in the short-term, in the long-term, depending on how much equity (i.e. what share of your company) is issued, it can work out to be far more expensive than debt financing. 

‍ The bigger the funds required, the more terms and conditions will be attached. This is as true for debt financing as it is for equity financing.

On balance however, at least debt financing means that terms are only imposed for the duration of the loan being paid. With equity financing, the party that provided equity finance now holds a share of your company and by extension, some of the voting rights.

Depending on the terms agreed, they may even be able to influence your company’s strategy. All issues to ponder when considering the trade off between financing with debt or equity. 

Note: While most articles of this kind take the narrative, ‘debt or equity’, we are keen to emphasize that your choice for financing doesn’t have to be one or the other.

There are hybrid options (i.e. combinations of the two) that may work out even better, particularly if you believe that your equity will be worth far more in the future.

Our recommendation is that you look at every option for financing available, including hybrid combinations of debt and equity. 

Valuing Equity

If your company isn’t publicly listed, you will need to conduct a valuation of your company. This will allow you to arrive at an estimate for how much of its equity needs to be sold to obtain the required amount of funds.

In a previous article DealRoom looked at how to conduct a valuation of a private company and the challenges involved in doing so. There are several issues to consider with a valuation, including where the market is in its cycle.

Depending on what value the professionally conducted valuation provides for your business, it may be better to wait until your equity has a higher valuation before undertaking your company’s equity financing.

Useful resources:

How the approach to valuation frames success for diligence and integration, intangible asset valuation: methods from an industry pro, avoiding valuation surprises and accounting for m&a transactions, equity financing: advantages and disadvantages.

First, the advantages of equity financing:

• Private equity companies are sitting on record levels of ‘dry powder’ (i.e. capital waiting to be invested), so there’s never been a better time to seek equity financing.
• When markets are trading at historic highs, holders of equity have the potential to use equity to fund transactions that would otherwise require excessive amounts of cash.
• Equity financing  tends to be a better option when interest rates are high, and debt financing becomes more expensive.
• If you raise equity financing with the right investment company, you may be able to benefit from their network and expertise.
• Raising equity financing with a high profile investment company (say, a blue chip private equity firm) is an excellent signalling mechanism for your company’s potential.
• Equity financing means none of the regular cash-sapping interest repayments that come with debt financing.

And the disadvantages of equity financing:

• The terms negotiated on your equity financing may hinder your company’s management from making growth-oriented decisions.
• In high-growth industries, or industries with uncertain futures, valuations can be challenging, opening the potential for undervaluing your company’s equity.
• The search for the right equity investor, combined with the time that it takes them to conduct due diligence on your company, can take several months.
• If relations sour with the equity investor after the equity financing, the investment may ultimately destroy value - negating the point of the investment in the first place.
• Dividing control of a company, particularly a private company, among several parties can make a sale of the company more challenging further down the road.

Using Equity Financing in M&A

As mentioned elsewhere in this article, all ten of the largest M&A transactions conducted this decade have involved some form of equity financing.

The biggest of these - the merger of S&P Global and IHS Markit in 2020 - was an all-equity affair, involving no cash or debt.

In the 9 or so months since the transaction, S&P Global’s share price has grown by over 25%, reflecting anecdotal evidence that it’s invariably a better idea to fund M&A transactions with equity when market valuations are looking frothy.

When considering whether to use equity financing for M&A, ask yourself honestly if you think your stock is a good buy at the current price. If the answer is ‘no’, it could provide you with a powerful weapon in an M&A transaction.

Equity Financing Due Diligence Checklist

1. capital-formation strategy.

• How much capital does the company really need, when does really need it, and whether there are alternative ways to obtain these resources?
• Do both parties have growth in company’s value once enter into an agreement?
• Is the deal structure going to 20% equity with 80% control or any other way? (or any other way)
• Is the chosen Capital Formation Strategy can mitigate risk or has downside protection?
• Obtain feedback on strengths and weaknesses from board members or other third parties.
• Comprehend the company's position against its public or private competitors by recognizing their public or private competitors.
• Asses the company's potential and how it fits into the investor's portfolio.
• Produce a tracking document/envieronment (to contact a lot of investors and process).

2. Preparing Confidential Info

• Make sure the business is on track with realistic and measurable goals, anticipating what is to come, reviewing the plan on a regular basis and revising if necessary.
• Brief history
• Mission and Vision Statement (why you are in this business)
• Discussion of your revenue and business model
• Overview of products and services
• Background of management team
• Key features of your market
• Summary of the company’s financial performance up to date
• How much money you need to raise and why?
• Organizational and management structure
• Operational and management policies
• Description of products and services (both current and anticipated)
• Overview of trends in the industry and marketplace in which the business compete (or plan to)
• Key strengths and weaknesses of the company
• Key products and services currently offered
• Proprietary features, strengths and weaknesses of each
• Anticipated products and services (how future product development and research will be affected by the financing you seek)
• The Role Your Business Plan Plays
• Prepapre a TOWS Analysis
• Strategies for reaching current and anticipated customers or clients
• Pricing policies and strategies
• Advertising and public-relations plans and strategic alliances
• Summary of financial performance for past three to five years
• Current financial condition (include recent Income Statements, Balance Sheets and Cashflows as attachments)
• Projected financial condition (present forecasts for three to five years)
• Discussion of working budgets and how capital will be allocated and used in accordance with these budgets will be extended.

3. Develop a Winning Pitch Deck

• Prepare a good summary than a lengthy discourse and piques the interest of potential investors.
• Problem - explains the market gap that needs to be filled in a way that people can relate to and investors can understand.
• Solution - needs to be concise, clear and scalable.
• Market - outline the past market, as well as future potential growth.
• Product or Services – in action
• Traction and Milestones - month over month growth of the business (e.g. revenue, metrics, etc).
• Team - describe the leadership’s team members.
• Competition – same-industry competitors
• Financials – 3- or 5-years performance and projections of the company
• Amount being raised - Instead of using specific amounts, consider using ranges of numbers.

4. Meetings and Immersion

• Present a brief and descriptive pitch deck
• Make a compelling narrative to share.
• Demonstrate your product or service's one-of-a-kind value.
• Present a solid and realistic data (with back ups)
• Describe your revenue strategy.
• Be prepared for any questions that may arise and be prepared to answer them in advance.

5. Creation of a Pro-Forma Cap Table

• Demonstrate the ownership and market value of the company both now and after a potential investment.
• Analyse the impact of investments, aftermath
• Identify the risks and rewards after a potential investment

To find a complete debt financing template visit our templates gallery and utilyze pre-built ready to use playbook. You can always customize it right inside the DealRoom to fit your needs.

The great thing about equity is that every company has it. The challenging part may be to convince investors that they want to give you money for it.

Equity financing brings a different set of considerations to debt financing, principally, understanding who you’re getting into business with.

ust as investors conduct due diligence on the companies that they invest in , those companies should conduct due diligence on the investors they’re giving part control of their company to.

Talk to DealRoom today about how our platform for M&A and services can help you through your equity financing process, and how we can improve the due diligence process of both sides of the transaction.

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Everything You Need To Know About Equity Financing

What Is Equity Financing?

How equity financing works, example of equity financing, pros and cons of equity financing, advantages:, no repayment stress, risk sharing with investors.

• businesses operating in volatile markets
• businesses embarking on ambitious projects.

Access To Expertise And Networks

Disadvantages, dilution of ownership, profit sharing, potential for conflict, types of equity financing, individual investors.

• family members
• professional acquaintances

Angel Investors

• convertible debt
• ownership equity

Venture Capital Firms

• larger amounts of investment
• rigorous management and strategic planning

Venture Capitalists

Venture capitalists (VCs) are professionals who manage funds invested in high-growth potential startups in exchange for equity. They are usually part of venture capital firms.

Initial Public Offerings (IPO)

Corporate investors.

• foster a partnership
• enter new markets
• access innovative technologies or products

Equity Crowdfunding

When to choose equity financing, if you’re a startup, if you can’t get funds from traditional lenders.

• stringent lending criteria
• high-risk business models

If You Don't Want To Be In Debt

If you'd like to receive expert guidance.

• strategic advice
• valuable industry contacts

If You Want To Sell Your Company In The Future

How to get equity financing, gather documentation.

• a business plan
• financial statements
• market analysis
• any other documents that showcase your business's potential

Find Investors

• networking events
• industry conferences
• online platforms

Negotiate How Much Equity To Give

Share profits and maintain transparent communication, alternatives to equity financing, debt financing, mezzanine financing, the benefits of equity financing over debt and mezzanine financing, vs debt financing, vs mezzanine financing, a loan could be a simpler, faster alternative, related articles.

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Equity Financing

A method of raising capital for a business by selling shares or ownership stakes to investors in exchange for funding

Previously a Portfolio Manager for MDH Investment Management, David has been with the firm for nearly a decade, serving as President since 2015. He has extensive experience in wealth management,  investments and portfolio management .

David holds a  BS  from Miami University in Finance.

What Is Equity Financing?

How equity financing works.

• Types Of Equity Financing
• Reasons To Prefer Equity Financing
• When To Consider Equity Finance?
• What Do Investors Look For Before Investing In A Business?
• Disadvantages Of Equity Financing
• Equity Financing Vs. Debt Financing

Equity financing is a way for businesses to raise capital by selling a portion of their ownership. This process involves attracting investors who contribute cash in exchange for a share of the company. This approach is commonly used by companies to fulfill both short-term and long-term financial needs.

Equity refers to the amount of capital invested by the owner of a company. Hence it also includes the value of shareholders’ stake in the company, as shareholders are owners of a company.

If a business owner is unable to fund the company independently or needs a substantial amount of capital to expedite growth, seeking external funding through equity financing becomes a practical and efficient solution that also allows quick access to capital.

Along with a significant cash investment, equity financing provides the owner the expertise to take their company to the next level.

The success of equity financing is closely tied to the company's financial performance . If the business achieves its financial goals, shareholders receive a favorable return on their investment. Return on investment, a widely used metric, serves as a measure of the profitability of an investment, reflecting the gains made by shareholders through dividends or selling their shares at a higher price.

Key Takeaways

Equity financing involves selling ownership stakes in a business to raise capital, commonly used by companies for short and long-term financial needs.

Equity encompasses the capital invested by the owner and the value of shareholders' stakes, making it a crucial element in financing decisions.

Equity financing is advantageous for businesses needing substantial capital quickly, offering both funding and expertise to propel company growth.

Unlike debt financing, equity financing doesn't impose a repayment obligation, and shareholders benefit from returns based on the company's success.

Various sources, including crowdfunding, angel investors, venture capital, IPOs, and family/friends, contribute to equity financing, with investors seeking unique ideas, solid financials, and a well-prepared business plan.

Financing through equity can be done at various stages of the company’s growth, whether an esteemed and established company or a start-up. Likewise, capital can be raised at various stages through multiple rounds.

When you raise funds through equity, the investor gets a part of the company's ownership. So choosing the right investors will give the business an excellent boost to grow to its full potential.

Patience is of utmost importance, as raising funds through this process can be a tedious and complicated pathway. It requires a significant investment of time and money.

The founder has to negotiate the terms of the deal and compile all the required legal documents to facilitate the process. Sourcing and evaluating interested parties, pitching ideas, and onboarding investors make it a lengthy process.

To find the right investors for your business, asking yourself these questions might help:

• Do their goals and vision for the business align with yours?
• Do they represent the core values and brand image of your business well?
• Can they provide access to a bigger and more valuable network?
• Finally, how much do you want them to participate in the affairs of the business?

Types of Equity Financing

A few of the sources are:

1. Crowdfunding

Crowdfunding is the process of raising money from many people to fund a business with the help of the internet and social media. Individuals who firmly believe in the company's vision contribute to the fund.

Crowdfunding provides access to a diverse group of investors. Equity-based crowdfunding is gaining wide popularity as it allows companies to raise capital without giving any stake.

2. Angel investors

An angel investor usually assists start-ups in their initial stages when they cannot onboard other investors. They are individuals with high net worth who offer capital to small ventures in exchange for angel investor equity or convertible debt.

The network, finance, connections, and other perks that angel investors provide to these businesses help the company to accelerate its growth to newfound heights in the long term.

3. Venture capital

Venture capital is an attractive opportunity for new companies with a limited operating scale and hasn’t reached the stage where they can secure a bank loan. Venture capital is a form of private equity financing.

Venture capitalists get a significant amount of ownership of the companies in exchange for the high risk of investing in early-stage companies. As a result, venture capitalists get a bulkier stake in the company compared to angel investors. 

4. Initial Public Offerings (IPOs)

In an IPO , shares of a company are sold to institutional investors and individuals to raise new equity capital. Investment banks underwrite these IPOs and also make arrangements for these shares to be listed on various stock exchanges.

Through this process, a privately held company is converted into a public company , enabling the funding of new capital and trading of existing shares with ease.

5. Family and friends

Offering a share in your business in exchange for finance to friends and family is a convenient way to raise funds as long as it does not strain your relationships with them.

Reasons to prefer Equity financing

Some of the reasons are:

1. Expertise and networking

Raising funds through equity finance gives access to networks with high-net-worth individuals. Their contacts, expertise, and other resources provide invaluable support to the company.

The assistance these angel investors or venture capitalists provide is crucial to the company's growth in its early stages.

2. Alternative funding source

Equity financing is a great way to raise funds in cases where companies do not qualify for a bank loan or raise funds through debt financing. Crowdfunding, IPOs, venture capitalists and angel investors become measures to raise funds.

3. Reduced burden

Unlike debt financing, it does not require the companies to pay timely interest. This is especially helpful to start-ups that do not make positive cash flows. The burden of making enough profits to pay interests is mitigated.

No loan is required in this process. Investors make plans for the long term; hence they do not expect returns on their investments immediately.

4. Creditworthiness issues

Start-ups not eligible for a bank loan due to their credit rating and history can raise funds through equity financing instead of debt. Creditworthiness is not an obstacle in equity financing.

5. Long-term vision

The investors who contribute their money to the business do not expect the start-up to give returns on their investments immediately. They believe in the vision of the company and plan for the long term.

The company is not burdened in its initial stages to make profits and provide a return on investment .

When to consider Equity finance?

Choosing the right way to raise funds for the business is crucial. The pros and cons are weighed and analyzed to determine which process works well for the business. Following are some factors one must consider while opting for equity finance:

a) How important is it for the owners to control the company with complete authority and ownership? 

It requires the owners to sell a portion of the company's stake in exchange for funds. If complete ownership is not essential to the owners, they may opt for equity funds.

b) Cost of finance

The overall aim of any business is to minimize the cost of finance and maximize owners’ wealth as much as possible. However, the cost of finance has a significant impact on net income .

Hence it is important to understand the repercussions while choosing the source of funds. Each type of financing has its own set of pros and cons. It is vital to understand each of them and decide upon the source.

c) What is the most suitable source of funding for the company?

If you intend to fund your business through equity finance, you must understand that you need access to investors interested in buying the shares.

Contradictory to what most business owners believe, a pool of venture capitalists is not readily available to provide funds to businesses.

Networking with a wide range of individuals, presenting the business plan with finesse , and negotiating many terms and conditions; are just some tasks to be carried out to fund the business using equity.

Equity finance is feasible only for those business owners who can justify the lack of debt. For the rest, debt finance would be a more suitable option to finance.

d) Business capital structure

The  gearing ratio  is a metric used to measure financial risk. It expresses a company’s debt in terms of its equity. A high gearing ratio indicates the company may be unable to meet its obligations.

Debt seems attractive due to its low financing cost, but it still has a disadvantage of the interest to be paid. If excessive capital is borrowed and the company cannot pay principal and interest, it may have to liquidate.

The company's capital structure must be reviewed thoroughly before opting for a type of finance.

What do investors look for before investing in a business?

Once you’ve decided equity finance is the right decision for the business, you’ve to start pitching the business plan to potential investors. Then, consult a business attorney who will assist you with writing contracts for the investors.

It is essential to clearly define the rules that apply and the role of every party involved in the company’s growth. But what is it that investors look for before investing in a business?

Venture capitalists are in the business of putting money into promising businesses where they can make money. They want a return on their investment in the long run. You're almost there if you can demonstrate your business can make money!

1. An extraordinary idea

With the market saturated with thousands of identical products, investors look for innovative and lucrative ideas. Does your company solve a unique problem? How does it stand out?

Conveying how your product is unique will convince them to invest in your business.

2. Crunch the numbers

The investors want to see the hard data! You need to show your business has been putting out great numbers. The data from balance sheets, profit, and loss statements, and cash flow statements should be at your fingertips.

If your business is in the pre-revenue or net loss stage, you need to explain to them your vision for the business, what you plan to achieve a few years down the line, your business model, etc.

3. Concrete business plan

A solid business plan should represent a successful business. A business plan mainly contains the vision and mission of the company, methods of achieving them, and the time required to do so.

Other than these items, a good business plan should include the sales channels, the target market, marketing strategies, financial projections, and potential hurdles and action plans to deal with them.

Being well prepared to make a successful pitch is of utmost importance. The business plan must be carefully designed, and the pitch must be made in a compelling narrative. Showing your investors that you’re future-oriented will assure them, as it is their biggest concern.

Disadvantages of Equity Financing

As much as equity financing seems like the most feasible method to raise funds for a business, it still has some disadvantages that should be considered before deciding to finance through equity.

1. Loss of control

The major disadvantage of raising funds through equity is a dilution of ownership and loss of operational control. But on the other hand, the investors and shareholders get a share of the profit they deserve.

2. Absence of tax shields

The interest paid on debt is tax-deductible, whereas the dividends distributed to shareholders are not tax-deductible expenses. Thus there is no  tax shield  with equity financing.

The lack of any tax shield makes equity financing more costly than debt financing in the long term.

3. Differences of opinion

Equity brings in multiple partners or owners involved in decision-making. As a result, there will likely be differences in opinion, and conflicts may arise between the partners due to differences in perspectives, administration, and management.

Equity financing Vs. debt financing

Equity and debt are ways in which businesses raise funds. Deciding which method is the most suitable for your business depends mainly on the need for ownership control, risk appetite, and the business capital structure.

Some sources of debt financing include:

• Instalment purchases

On the contrary, equity financing sources include:

• Institutional investors
• Angel investors
• Venture capital firms
• Corporate investors.

With debt financing, making payments is required almost immediately. If not done at the right time, you may lose your collateral. In addition, the monthly payments may cause cash flow issues when the business does not have enough working capital .

Even with these cons, you get complete ownership and control over the business, unlike in the case of equity. In addition, debt interest payments are also tax-deductible, thereby decreasing the taxable income.

If the business is not at a profitable stage, it can be tricky to adopt debt financing. However, financing through equity could be riskier as the investors expect a huge share of profits in the long term.

Ownership control is sacrificed in equity financing to a huge extent. It may also be possible that the investors own more share control than the owner themselves.

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Researched and authored by Sumedha Vasadi | LinkedIn

Reviewed and edited by Justin Prager-Shulga  |  LinkedIn

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What Is Equity Financing?

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Equity financing is when an investor agrees to supply a specified amount of their capital in exchange for equity in your business. The most common equity financiers include venture capitalists and angel investors. However, there are some significant differences between these investors that we’ll dive into later.

The key benefit of leveraging equity as a financing option is that there’s no debt—you’ll never make a single loan payment. Equity investors aren’t interested in loan payments as they are interested in becoming an integral part of your business and getting a return from a percentage of your sales profits.

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What influence do investors have over my business?

It’s crucial to understand the level of influence equity funders will have on your company. If you’re not interested in sharing your company with someone else, angel investors and venture capital firms may not be for you.

The exact level of influence an investor will legally have will depend on the amount of equity they get from the deal and its terms. There are a few different levels of ownership and influence you should know about:

• Majority ownership . This happens when an investor owns more than 50% of your shares. With majority ownership in your company, the investor essentially has complete control.
• Minority active . Your investor owns 20%–50% of the shares at this level. This does not give them total control over management decisions, but it does give them the right to influence your decisions. You’ll have to keep them in the loop and council over major decisions.
• Minority passive . Your investor has less than 20% of your equity shares at this level. Their small stake in your company gives them little to no influence over business decisions.

Another thing to consider is that there are venture capitalists and angel investors who will like your company, the way you run it, and the direction it’s heading in, and will happily let you make most of the business decisions despite their equity stake. You shouldn’t count on this, but it has been known to happen.

Almost all investors will expect a share of your profits as part of their equity deal. And they should be paid because they’re shouldering the bulk of the risk upfront.

The main benefit of an investor taking a profit percentage is you have to pay them only when you’re making money, keeping you out of debt.

How can equity financing benefit my business?

You shouldn’t count out the usefulness of bringing on an investor. The right investor or investment group may bring expertise and opportunity to your business to improve your cash flow and keep your business out of debt.

Often angel investors and venture capital groups are industry-leading professionals who have helped convert small businesses into major players. A lot of growth can come from having an expert mentor with a vested interest in the success of your company on your board of directors.

What should I look for in an investor?

The most important aspect of searching for an equity funding partner is finding someone whose vision and interests are a good fit for you and your company. You want to find an individual or group whose expertise and personality work well with you and your business.

Will my business attract investors?

If you feel pretty good about bringing on an investor to help run your business, you’re on the right track. The next question you’ll have to answer is whether your business will interest a venture capitalist or angel investor.

It’s crucial to figure this out because finding and securing equity funding can be a long and demanding process. You’ll be pitching your business over and over, so you should at least know whether you’ll be dead on arrival or have a fighting chance.

The first and most important thing any investor will look at is whether your business model is scalable . Equity investors want a quick and lucrative ride, so businesses without a lot of growth potential are completely out of the question.

What’s the difference between an angel investor and a venture capitalist?

There are some differences in the types of businesses venture capitalists will fund versus what angel investors will fund. You may be able to secure funding from one but not the other.

Angel investors are generally wealthy individuals interested in helping small businesses grow. The TV show, Shark Tank , is a reality TV representation of angel investors—individuals looking for companies that fit well into their networks and expertise.

Venture capitalists , on the other hand, are institutional investors from much larger conglomerates comprised of financial groups. These groups are interested in helping well-established, high-growth-potential businesses expand into large corporations. And these conglomerates often consist of financial firms, insurance companies, pension funds, and university endowments.

So with their individual goals, venture capitalists and angel investors tend to lean toward different business types:

• Venture capitalist groups tend to invest in experienced companies with established revenue growth.
• Angel investors typically prefer younger companies with strong growth potential.

Deciding whether to approach an angel investor or a venture capital group largely depends on the age and profitability of your business, though you should also factor in how much funding you need to reach your next growth stage.

Equity investors will push for a liquidity event

Most investors looking for equity in your business will push for an opportunity to cash out. Liquidity events are opportunities that allow them to do just that.

The two most common liquidity events are a business acquisition and an initial public offering (IPO). These events allow investors to convert their non-liquid equity in your business into cash.

Common liquidity event 1: Business acquisition

Your business reaching a point where another company is interested in an acquisition presents an opportunity for your investors to negotiate an equity payout. They’ll usually take a percentage of the total buyout value equal to their equity ownership percentage in your business.

Equity investors have a vested interest in making your company profitable and valuable because being acquired means a big payday for them and for you.

We won’t get into the nitty-gritty of the different kinds of acquisitions and what they mean for your business, but be aware that investors will likely be gearing toward this event in the medium to long term.

Common liquidity event 2: Initial public offering

An initial public offering (IPO) is the process of converting your business from a private to a public company. Your company will have to be valued at around $1 billion for an IPO to commence and must be mature enough in its processes to meet SEC regulations and reporting expectations.

These regulations are complicated and detailed. So when your company is at the brink of an IPO, be sure to get in touch with your accountant so you can be ready for the regulatory nightmare. Once that’s sorted, you’re ready to go public.

You’ll be able to issue shares when it’s a public company. For the investor, this presents an opportunity to convert their equity shares into cash. At this point, your investor may choose to cash out.

Going public allows you to bring a heaping pile of financing into your business as you issue shares to the public.

Inequality is the biggest problem with equity financing

Now we get to the elephant in the room. In 2019, female founders received only 2.7% of venture capital funding. 1 That leaves a whopping 97.2% left over for male-founded and mixed male-and-female-founded businesses.

Equity investment is a boys’ club. It has been for years, and there’s not a lot of hope for improvement in the future. Nothing makes us more bothered than having to recommend that women avoid equity funders due to historical prejudice.

That said, there are venture capitalist organizations and angel investors out there who prioritize female-led businesses. Women should seek out individuals and organizations interested in promoting their needs.

While equity financiers interested in connecting female entrepreneurs with capital are rare, there are a number of other financing options tailored to the needs of women-owned businesses .

The takeaway

Equity financing is a way for your business to get the funding it needs to grow in exchange for equity in your company. While this does mean you lose some say over the direction of your business, you’ll be bringing on an industry expert who can help you see inefficiencies and growth opportunities and can connect you to their network and resources.

These investors ultimately want to cash out, so they’ll steer your company toward an acquisition or an initial public offering. Your business will have to be in a solid state of growth and stability for either of these things to happen, meaning your investor wants to help you get there.

Equity investing is only one of many ways to finance growth. If you'd like to look into traditional business loans, check out our top picks for small-business loans in 2020 .

Related reading

• Best Business Acquisition Loans 2023
• What Is an Angel Investor?: Who They Are and What They Can Do for Your Business
• What’s a Venture Capitalist?
• What Is the Difference Between an Angel Investor and a Venture Capitalist?

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

• Pitchbook, “ The VC Female Founders Dashboard .” Accessed June 11, 2022.

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What Is Equity Financing?

Definition and Examples of Equity Financing

Types of equity financing.

• How Equity Financing Works

Pros and Cons of Equity Financing

Equity financing vs. debt financing.

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Equity financing is a way of funding your business by selling shares to investors.

Key Takeaways

• Equity financing involves selling part of your company to investors in exchange for money.
• Equity financing is one way to raise cash without risking collateral or requiring repayment. 
• When you use equity financing, you no longer own 100% of your business.
• Several methods of equity financing are available, depending on the size and type of business.

Equity financing involves selling a portion of your business to raise funds. Some companies sell shares of their stock, while others sell portions of their business to friends, family members, or private investors. 

For example, a startup may be able to operate on a shoestring during the research and development phase of developing its app. But once the app is ready for launch, the company will need advertising, tech support, customer service reps, and more. To raise funds for the launch, the company could take out a business loan , a form of debt financing. In this case, the company would have to provide collateral—something of value that could be repossessed by the bank if the company defaults on the loan—and start paying back the loan with interest almost immediately. 

But if the product and business plan are strong, the founders may instead be able to attract equity financing from investors who are willing to put their money into the company in exchange for partial ownership. 

Equity financing does not require collateral or repayment, because the funders are essentially buying a percentage of the business.

There are multiple types of equity financing, and all of them involve selling a portion of your business to raise funds.

• Angel investing : Angel investors are typically the first outside investors to invest in a new startup. They’re taking a chance on a business that has yet to establish itself, often in exchange for a larger share of equity. 
• Crowdfunding : You might decide to raise funds for a new business through an online crowdfunding platform, such as Kickstarter. Potential investors read about your business and may invest at varying levels. It may be possible to offer products and services in exchange for investment instead of partial ownership of your business, especially if you are making or doing something particularly exciting or interesting. 
• Venture capital funding : Venture capitalists, or VCs, are professional investors who carefully select businesses that are likely to make a great deal of money in a relatively short time. Once they decide to invest, they may put a great deal of money into a company. In exchange, they often own a large portion of the business and have a significant presence on the board.
• Initial public offerings : An initial public offering (IPO) occurs when a large corporation begins to sell shares through the stock market to individual investors. IPOs are only available to well-established corporations. In many cases, founders and venture capitalists leave the company once an IPO has been offered. 

How Equity Financing Works 

Equity financing can work in different ways depending on your company’s status, size, and potential earning power. 

For example, small startups won’t be able to sell shares on the stock market but may be able to attract private investments from friends and family in exchange for a portion of the business. To convince a friend or family member to put their money behind your business, you will usually need to create a business plan and be able to answer questions about how you intend to make your business profitable. Startups with major earning potential may be able to attract large investments from professional investment firms that make money by buying into lucrative opportunities. For example, a local restaurant or salon is unlikely to attract venture capital (VC), but a business software concept might interest a VC company. You’ll generally need to be introduced to a VC funding group by someone you know. Once your foot is in the door, you’ll be asked to attend a series of meetings and provide paperwork, including an impressive business plan, to demonstrate your company’s potential. 

Accepting VC funding means the venture capital group will own a sizable chunk of your business and will expect to be involved with decisions that impact its direction and potential success.

While it takes time for a business to grow large enough and establish a solid history of success to pursue an IPO, by this point you’ll have the resources to hire professionals to guide you through the process.

You can raise money without risking collateral

You will not need to pay back the money or pay interest on it

You will lose some control of your business

Others will reap some of the rewards of your business’s success

Many business owners find themselves thinking about equity financing vs. debt financing when it comes to funding a business. The two methods are quite different, so it’s worth taking the time to understand the tradeoffs.   

Penn State University. " Equity Financing ." Accessed Nov. 4, 2021.

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Learn from the business planning experts, resources to help you get ahead, equity financing, table of contents.

• Equity financing is a method of raising capital through the sale of shares in a business. This approach involves selling a portion of the ownership in the company to investors in exchange for funding. Unlike debt financing, which involves loans that need to be repaid, equity financing offers capital in return for a stake in the business.

Key Takeaways

• Basics and Distinction: Equity financing is distinct from debt financing, as it does not require repayment but results in shared ownership.
• Role in Business Growth: It is crucial for funding new ventures, especially when traditional debt financing may not be feasible or desirable.
• Pros and Cons: While offering a vital source of capital, equity financing also means sharing control and potential profits.

Relevance to Different Audiences

Business school students.

For students of business and finance, understanding equity financing is critical. It forms a core part of learning about how businesses are funded and how they grow.

Key Learning Points

• Corporate Finance Concepts: Exploring the mechanics and implications of raising capital through equity.
• Strategic Analysis: Understanding when and why a business might choose equity financing over other funding options.

Pre-Revenue Startups

For startups, particularly those in the early, pre-revenue stage, equity financing can be a lifeline, providing the necessary funds to develop products, enter markets, and scale operations.

Key Considerations:

• Access to Capital: Navigating the process of attracting and negotiating with investors.
• Equity Dilution: Balancing the need for funds with the dilution of ownership.

Small and medium business owners might consider equity financing to fund expansion projects, develop new products, or enter new markets without increasing their debt load.

Practical Strategies

• Business Expansion: Using equity financing to fund growth without over-leveraging.
• Investor Relationships: Building strategic partnerships with investors who bring more than just money to the table.

Frequently Asked Questions

• What is equity financing and how does it work?

Equity financing is a process where a company raises capital by selling shares of its business to investors. In exchange for their investment, these investors receive ownership interests in the company. This method is often used by startups and growing businesses that might not have the collateral or revenue history to secure traditional loans.

The key difference between equity and debt financing lies in the obligation to repay. Debt financing requires the company to repay the borrowed amount with interest, typically in a fixed timeframe. Equity financing, on the other hand, involves selling a part of the business’s ownership in exchange for funds, without the obligation of repayment. However, equity investors expect a return on their investment through the company’s growth and profitability.

• What are the advantages of equity financing for startups and small businesses?

Advantages of equity financing include:

• No Repayment Obligation:  Unlike loans, there’s no requirement to repay the funds.
• Access to Capital: It can provide significant capital, often more than what can be borrowed.
• Expertise and Networking : Investors often bring valuable industry experience, contacts, and mentorship.
• Less Financial Risk : Without the pressure of repayments, there’s often more financial flexibility.
• What are the drawbacks or challenges of equity financing?

The drawbacks of equity financing include:

• Dilution of Ownership: Founders must give up a portion of their ownership, which can mean losing some control over business decisions.
• Potential for Conflict: Differences in vision between investors and founders can lead to conflicts.
• Pressure for Performance:  Investors expect the business to grow and become profitable, which can add pressure.
• How do business owners and investors typically negotiate equity financing deals?

Negotiations for equity financing deals involve:

• Valuation of the Business:  Determining the company’s worth, which affects how much equity is given for the capital invested.
• Term Sheets: Drafting and agreeing on a term sheet that outlines the terms and conditions of the investment.
• Due Diligence: Investors conduct a thorough review of the business’s financials, operations, and legal standing.
• Legal Agreements: Finalizing the deal through legally binding documents that detail the investment terms.

Related Terms

• Venture Capital: Funding provided to startups and small businesses with high growth potential by investors or venture capital firms.
• Angel Investors: Individuals who provide capital to startups, often in exchange for convertible debt or ownership equity.
• Share Capital: The funds raised by a company in exchange for shares of ownership.
• Initial Public Offering (IPO): The process by which a private company offers shares to the public in a new stock issuance, thus becoming a publicly-traded company.
• Shareholders: Individuals or entities that own a share of a company’s stock, making them partial owners of the company.

Also see: Private Equity , Equity , Debt Financing , Angel Investor , Venture Capital (VC)

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Financial Tips, Guides & Know-Hows

Home > Finance > What Is Equity Financing In Business

What Is Equity Financing In Business

Published: January 3, 2024

Learn the benefits and process of equity financing in business. Finance your venture with equity capital and gain long-term funding and strategic partnerships.

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Table of Contents

Introduction, definition of equity financing, advantages of equity financing, disadvantages of equity financing, types of equity financing, how does equity financing work, key considerations for equity financing, examples of equity financing in business.

Welcome to the world of finance, where businesses utilize various methods to raise capital for their operations and growth. One such method is equity financing, which plays a crucial role in the financial landscape. Whether you are an entrepreneur seeking funding for your startup or a seasoned business owner looking to expand, understanding equity financing is essential for achieving your goals.

Equity financing, also known as equity funding, is a method of raising capital by selling shares or ownership interests in a business to investors. In return for their investment, these investors become partial owners of the company and benefit from its future success. Equity financing serves as an alternative to traditional debt financing, where businesses take on loans or issue bonds to acquire funds.

Equity financing offers numerous advantages and disadvantages for both businesses and investors. By understanding the intricacies of equity financing, you can make informed decisions about whether it is the right choice for your business needs.

In this article, we will delve deeper into the world of equity financing, exploring its definition, advantages, disadvantages, and key considerations. We will also examine different types of equity financing and provide examples to illustrate how it works in real-world scenarios.

Equity financing is a method of raising capital for a business by selling shares or ownership interests to investors. In this type of funding, investors provide funds in exchange for ownership stakes, allowing them to participate in the company’s profits and future growth. Unlike debt financing, equity financing does not involve borrowing money that needs to be repaid with interest.

When a business decides to pursue equity financing, it issues equity securities such as stocks or shares. These securities represent ownership rights in the company and grant investors certain privileges, such as voting rights, dividends, and a claim on the company’s assets. The value of these securities can fluctuate based on various factors, including the company’s performance and overall market conditions.

Equity financing is commonly used by startups and early-stage companies that may not have sufficient cash flow or collateral to secure traditional loans. It offers a way for these businesses to raise funds without taking on additional debt or making regular interest payments. Additionally, equity financing can provide more flexibility in terms of repayment and often comes with additional benefits, such as access to the investors’ network and expertise.

It is important to note that equity financing does come with its own set of implications. By selling ownership interests in the company, the business relinquishes a portion of its control and decision-making authority to the investors. This means that investors may have a say in strategic decisions and may influence the direction of the company. However, for many businesses, the benefits of equity financing outweigh the potential loss of control.

Overall, equity financing serves as a vital tool for businesses to raise capital and fuel their growth. It allows companies to access funds, expertise, and resources from investors, while investors have the opportunity to support promising ventures and potentially earn significant returns on their investments.

Equity financing offers several advantages for both businesses and investors. Let’s explore some of the key benefits of this funding method:

• No Debt Obligation: Unlike debt financing, equity financing does not create any debt obligations for the business. This means that the company does not have to make regular interest payments or worry about repaying the principal amount. This can help alleviate financial pressure, especially for startups and small businesses with limited cash flow.
• Shared Risk: With equity financing, the risk of the business is shared among the investors. If the business fails or faces financial difficulties, the burden is not solely placed on the company, but is also distributed among the investors. This can provide a sense of security for the business and reduce the overall risk of failure.
• Access to Expertise and Networks: Equity financing often brings investors who have industry expertise and valuable networks. These investors can provide guidance, mentorship, and access to resources that can help the business grow and succeed. They may have connections to potential customers, suppliers, and strategic partners, which can open doors to new opportunities.
• Long-Term Partnership: Equity financing creates a long-term partnership between the business and its investors. Unlike loan repayments, which have a definite end date, equity investors have a vested interest in the ongoing success of the business. This can align the interests of the investors and the business, fostering a mutually beneficial relationship.
• Potential for High Returns: Equity financing provides investors with the potential for high returns on their investment. As the business grows and becomes more successful, the value of the company increases, thereby increasing the value of the investors’ ownership stake. If the business goes public or is acquired, investors may realize significant gains on their initial investment.

These advantages make equity financing an attractive option for businesses seeking capital and investors looking for opportunities to grow their wealth. However, it is important to weigh these benefits against the potential drawbacks and carefully consider the specific needs and goals of the business before pursuing equity financing.

While equity financing offers numerous advantages, it is essential to be aware of its potential drawbacks. Here are some of the disadvantages associated with equity financing:

• Loss of Control: When a business raises capital through equity financing, it dilutes its ownership by selling shares or ownership interests. This means that the business owner or founders may have to share decision-making authority with the investors. Significant equity investors may have voting rights and the ability to influence key strategic decisions, potentially leading to a loss of control for the original founders.
• Sharing Profits: Equity financing involves sharing the profits of the business with the investors. As the business generates profitability, it is obligated to distribute dividends or other profit-sharing arrangements to the shareholders. This can result in a reduction of the business’s retained earnings and limit its ability to reinvest profits for growth.
• Overvaluation or Undervaluation: Determining the valuation of a business during equity financing can be complex. Overvaluation may result in a higher share price, which could lead to inflated expectations from investors. On the other hand, undervaluation may result in the business selling a larger portion of its ownership for a lower valuation, potentially limiting the founder’s potential gains in the future.
• Reporting and Compliance: When a business has external equity investors, it may be required to comply with reporting and regulatory requirements. This can involve preparing and providing regular financial statements, disclosures, and other compliance-related documents. Meeting these compliance obligations can be time-consuming and costly for the business.
• Loss of Privacy: Equity financing may require the disclosure of sensitive business information to potential investors. While necessary for making informed investment decisions, this heightened transparency can compromise the privacy and confidentiality of the business’s operations, strategies, and intellectual property.

It is crucial for businesses considering equity financing to carefully weigh these disadvantages against the benefits. The trade-off between ownership, control, and access to capital should be evaluated based on the specific circumstances of the business and its long-term goals.

Equity financing encompasses various methods through which businesses can raise capital by selling ownership interests. Let’s explore some of the common types of equity financing:

• Angel Investors: Angel investors are typically high-net-worth individuals who provide early-stage funding to startups in exchange for an ownership stake. These investors often bring industry experience and contacts to the table, along with capital.
• Venture Capital: Venture capital firms invest in startups and early-stage companies with high growth potential. In addition to funding, venture capitalists provide strategic guidance and mentorship. They typically invest larger amounts of capital and acquire a significant ownership stake.
• Private Equity: Private equity firms invest in established businesses with the aim of improving their operations, profitability, and value. They often target companies with a proven track record and potential for growth. Private equity investors may acquire a controlling stake and work closely with management to drive growth and increase the value of the business.
• Initial Public Offering (IPO): An IPO is the process by which a private company goes public by offering shares to the general public. This allows the company to raise significant capital and provides liquidity for existing shareholders. While an IPO can be complex and time-consuming, it can be a transformative event for a business.
• Crowdfunding: Crowdfunding platforms allow businesses to raise funds from a large number of individuals, typically through online platforms. Equity crowdfunding enables individuals to invest in a business in exchange for shares or ownership interests. This method has gained popularity in recent years, mainly for startups and small businesses.
• Strategic Partnerships: Strategic partnerships involve collaboration between two or more companies that bring complementary strengths and resources to the table. In some cases, a strategic partner may invest capital in exchange for an ownership stake. This type of equity financing can provide access to specialized resources, technology, and distribution channels.

It is essential for businesses to consider the specific requirements, benefits, and risks associated with each type of equity financing. Evaluating factors such as the stage of the business, growth potential, and the expertise and network of potential investors can help determine the most suitable type of equity financing for a particular situation.

Equity financing involves several key steps and processes. Let’s take a closer look at how equity financing typically works:

• Business Evaluation: Before pursuing equity financing, a business needs to evaluate its financial needs and growth potential. The company’s valuation is determined based on its current financial status, market position, intellectual property, potential for growth, and other factors.
• Investor Search: The next step involves identifying potential investors who are interested in investing in the business. This can include angel investors, venture capitalists, private equity firms, or strategic partners. Networking, attending industry events, and utilizing professional connections can help in finding suitable investors.
• Business Pitch: Once potential investors have been identified, the business prepares a compelling and comprehensive pitch that outlines its value proposition, market opportunity, growth strategy, and financials. The pitch should highlight the potential for a return on investment and the benefits of investing in the business.
• Negotiation and Due Diligence: If an investor expresses interest, negotiations take place regarding the terms of the investment, including the amount of investment, ownership stake, and any additional agreements or conditions. The investor then conducts due diligence to assess the business’s financials, operations, and potential risks before making a final decision.
• Investment Agreement: Once the negotiation and due diligence process is completed, an investment agreement is created. This agreement outlines the terms and conditions of the investment, including the percentage of ownership, investor rights, expected returns, and any specific obligations or restrictions on both parties.
• Funds Disbursement and Growth: After the investment agreement is signed, the investor provides funds to the business. These funds are used for various purposes, such as product development, marketing, hiring, or expanding operations. The business then works towards achieving its growth objectives with the support of the investor.
• Profit and Exit: As the business grows and generates profits, the investor may receive a share of the profits in the form of dividends or other profit-sharing arrangements, depending on the terms of the investment agreement. Additionally, the investor may exit their investment through methods such as acquisition, initial public offering (IPO), or sale of their stake to another investor.

It is crucial for both the business and the investor to have a clear understanding of the terms and expectations before entering into an equity financing arrangement. This includes a thorough review of the investment agreement, legal considerations, and ongoing communication and collaboration between all parties involved.

Equity financing can be a significant decision for both businesses and investors. Before diving into this funding method, it is important to carefully consider the following factors:

• Business Objectives: Clearly define your business objectives and the purpose of seeking equity financing. Determine how much capital is needed, how it will be utilized, and the expected return on investment. Having a solid business plan and growth strategy is crucial in attracting potential investors.
• Valuation and Ownership: Assess the value of your business and determine how much ownership you are willing to give up in exchange for the investment. Valuation methods may vary, so seeking professional advice or conducting market research can help establish a fair valuation for your company.
• Investor Fit: Consider the expertise, network, and industry experience of potential investors. Look for investors who align with your business goals and can provide more than just capital. Research the track record of investors and their involvement with other portfolio companies to ensure a good fit.
• Legal and Regulatory Compliance: Understand the legal and regulatory requirements associated with equity financing. Consult with legal professionals to ensure compliance with securities laws, reporting obligations, and other legal considerations. Failure to comply with regulations can lead to legal consequences and damage the reputation of your business.
• Impact on Ownership and Control: Evaluate the potential impact of equity financing on your ownership and control of the business. Consider how much influence you are willing to give up and the implications of sharing decision-making authority with investors. Striking a balance between capital infusion and retaining control is crucial to maintaining the vision and direction of your business.
• Future Growth and Exit Strategy: Consider the long-term implications of equity financing. Reflect on how the funds raised will facilitate your business’s growth and how it aligns with your exit strategy. Discuss potential exit scenarios with investors to ensure mutual understanding and alignment of goals.
• Financial and Operational Transparency: Prepare to provide financial and operational transparency to potential investors. Be prepared to share information about your business’s financials, cash flow, operations, and growth plans. Transparency builds trust with investors and increases the likelihood of securing their investment.

By carefully considering these key factors, you can make informed decisions about equity financing that align with the objectives and long-term vision of your business. Conducting due diligence, seeking professional advice, and maintaining open communication with potential investors will contribute to a successful equity financing arrangement.

Equity financing has played a significant role in the success of many businesses across various industries. Let’s take a look at a few notable examples of equity financing:

• Facebook: In its early stages, Facebook raised substantial equity financing to fuel its growth. Notable investments include venture capital firm Accel Partners, which invested $12.7 million in 2005, and later investments from companies like Microsoft and Russian investment firm Digital Sky Technologies. These investments helped Facebook expand its user base, develop new features, and eventually become one of the most valuable companies in the world.
• Uber: Uber, the ride-hailing giant, has relied on multiple rounds of equity financing to support its rapid expansion. Early investors include venture capital firms such as Benchmark, First Round Capital, and Lowercase Capital. Uber has also attracted large investments from companies like Toyota and Saudi Arabia’s Public Investment Fund. These investments have helped Uber grow its presence globally and diversify into additional services such as UberEATS and Uber Freight.
• SpaceX: SpaceX, the aerospace manufacturer and space transportation company founded by Elon Musk, has raised substantial equity financing to support its ambitious goals. Notable investors include venture capital firms Draper Fisher Jurvetson and Founders Fund, as well as a $1 billion investment from Google in 2015. These investments have helped SpaceX develop and launch revolutionary spacecraft, including the Falcon 9 rocket and the Dragon spacecraft.
• Beyond Meat: Beyond Meat, a plant-based meat substitute company, has attracted significant equity financing to fuel its growth and innovation. Notable investors include venture capital firms such as Kleiner Perkins and Obvious Ventures, as well as strategic investments from companies like Tyson Foods and Leonardo DiCaprio’s Earth Alliance. These investments have enabled Beyond Meat to expand its product offerings, improve manufacturing capabilities, and increase market share in the rapidly growing plant-based protein industry.
• Netflix: In its early years, Netflix relied on equity financing to establish itself as a leading streaming media service. Reed Hastings, the co-founder and CEO, secured investments from venture capital firms such as Technology Crossover Ventures and Accel Partners. Equity financing played a crucial role in the company’s transition from a DVD-by-mail service to an online streaming platform, revolutionizing the way people consume entertainment.

These examples demonstrate how equity financing has played a vital role in the growth and success of businesses across different sectors. Equity investments from venture capital firms, strategic partners, and even large corporations have provided these companies with the necessary funds, expertise, and resources to innovate, expand their operations, and ultimately disrupt their respective industries.

Equity financing is an important method for businesses to raise capital and fuel their growth. By selling ownership interests to investors, businesses can secure funds without taking on additional debt or making regular interest payments. This funding method offers several advantages, including no debt obligation, shared risk, access to expertise and networks, long-term partnerships, and the potential for high returns.

However, equity financing is not without its drawbacks. Businesses should carefully consider the potential loss of control, sharing of profits, valuation risks, reporting and compliance obligations, and loss of privacy that come with equity financing. It is crucial to evaluate the specific needs and goals of the business and to find investors who align with these objectives.

When pursuing equity financing, businesses and investors must go through a series of steps, including business evaluation, investor search, negotiation and due diligence, and the creation of investment agreements. Ongoing financial and operational transparency, as well as strategic planning for future growth and potential exit strategies, are integral parts of the equity financing process.

Notable examples of successful equity financing include Facebook, Uber, SpaceX, Beyond Meat, and Netflix. These companies have raised significant capital through equity financing, allowing them to innovate, expand, and disrupt their industries.

In conclusion, equity financing offers an alternative and potentially advantageous avenue for businesses to raise capital. It provides access to funds, expertise, and networks from investors, giving businesses the resources they need to thrive and succeed. However, it is crucial to carefully consider the potential implications and weigh them against the benefits before pursuing equity financing. With thorough planning, research, and alignment of goals, equity financing can be a valuable tool for businesses to achieve their growth objectives.

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Understanding Equity Financing Meaning for Small Businesses in 2023

As a small business owner, understanding the various financing options available to you is crucial for the growth and success of your venture. One such option is equity financing, which can provide small businesses with the capital they need to expand, innovate, and compete. In this blog post, we will explore the equity financing meaning for small businesses in 2023, helping you gain a better understanding of this valuable funding option and how it could potentially benefit your business. Are you ready to dive into the world of equity financing and learn how it could help propel your small business to new heights?

Short Summary

• Equity financing is the process of raising capital by offering ownership shares in exchange for funds.
• Different types of investors and stocks are involved, with potential benefits and drawbacks to consider when preparing a compelling pitch & business plan.
• Companies must be aware of regulations & best practices when seeking equity financing to protect investors while increasing their chances at securing growth capital.

Defining Equity Financing

Equity financing, also known as equity finance, is the process of raising capital by offering ownership shares in a company to investors in exchange for funds. This method of financing is an alternative to debt financing, where businesses borrow money that must be repaid with interest. The term equity financing refers to sources of equity financing, which may include an entrepreneur’s friends and family, professional investors, or an initial public offering (IPO). The objective of equity financing is to generate substantial capital to facilitate rapid and expansive growth, making the company more appealing to potential buyers and enabling a sale to be feasible.

In contrast to debt financing, equity financing does not necessitate repayment, and equity investors become partial owners of the company. The types of equity financing available can be varied and are derived from different sources, such as angel investors, venture capital firms, and equity crowdfunding. While both debt and equity financing have their advantages and disadvantages, it is essential for small business owners to understand the nuances of each option, including the comparison of equity financing vs debt financing, and choose the one that best aligns with their company’s goals and objectives.

One significant distinction between equity financing for public and private companies lies in the method of raising capital. Public companies can raise funds through an initial public offering (IPO), which involves offering shares of their business to the public through a new stock issuance. This can be an alternative to additional debt financing, potentially lowering debt financing costs and providing the necessary capital for growth. On the other hand, private company financing can be accessed through various sources of equity financing, such as angel investors or venture capitalists.

The Basics of Equity Financing

In equity financing, the company seeking capital, the investors providing the capital, and intermediaries facilitating the transaction are the key players. Investors provide capital in exchange for ownership shares in a company, which is then used to fund operations, growth, and other investments without the need for loan payments. Equity financing can be pursued through a variety of means, including venture capital investment or equity crowdfunding, which are alternatives to debt financing.

The benefits of equity financing include access to capital without incurring debt, the possibility of increased valuation, and access to expertise and networks. On the other hand, the drawbacks include dilution of ownership, potential loss of control, and potential conflicts of interest.

When seeking equity financing or considering a business loan, it is imperative to craft a compelling pitch, develop a robust business plan, and identify suitable investors.

Key Players in Equity Financing

Major sources of equity financing include equity financing individual investors, venture capitalists, angel investors, and public offerings through IPOs. Individual investors typically include friends, family members, and colleagues of business owners who invest comparatively smaller amounts of money. While these investors may not possess relevant industry experience, business skills, or guidance to contribute to a business, they can still play a crucial role in providing early-stage capital.

Venture capitalists and angel investors, on the other hand, are professional investors who often have extensive industry experience and connections. These investors, including the angel investor, provide not only capital but also valuable guidance and resources to help businesses grow and succeed. A venture capitalist, as part of venture capital firms, typically focuses on providing capital to businesses with high potential for rapid growth.

Lastly, initial public offerings (IPOs) are a means of obtaining equity financing by offering shares of a private company to the public for the first time. This method of equity financing is typically used in the later stages of a company’s growth, after it has achieved significant milestones and is ready to be traded on the public market.

How Equity Financing Works

Companies offer shares to interested parties, and investors receive returns as the company grows. Equity financing can be used to raise funds internally or externally through various types of shares and stages of a startup’s evolution. From early-stage investments by angel investors to later-stage financing through IPOs, equity financing provides a flexible and scalable way for businesses to access the capital they need to grow and thrive.

The process of equity financing involves offering ownership stakes in a company in exchange for capital, which does not require repayment and can range from small to large scale investments. Depending on the stage of the company and the type of investor, the terms of the equity financing deal may vary. For example, angel investors may provide seed capital for early-stage startups, while venture capital firms may invest in later-stage companies with proven growth potential. Understanding how equity financing works can be crucial for businesses seeking investment.

Types of Shares

In equity financing, various types of shares can be issued to investors, such as common stock, preferred stock, and convertible stocks. Common stock is a type of equity security that grants owners voting rights and may provide dividend payments.

Preferred stock, on the other hand, is a type of equity security that has the following characteristics:

• It has priority over common stock with regard to assets and earnings
• It does not usually grant voting rights
• It may entitle holders to receive dividends.

Convertible stocks are another type of equity security that can be converted into another security, such as common stock or preferred stock. These types of shares offer investors flexibility and the potential for increased returns as the company grows and its stock value appreciates.

Stages of Seeking Equity Financing

Equity financing can be sought at different stages of a company’s growth, from early-stage investments by angel investors to later-stage financing through IPOs. Angel investors generally offer early-stage capital to support a company’s growth, often providing not only funds but also invaluable guidance, mentorship, and connections to help the business succeed.

As a company grows and reaches significant milestones, it may seek additional equity financing through venture capital firms or even an IPO. Going public through an IPO offers the opportunity to raise substantial capital and gain exposure on the public market, though it may also result in a potential loss of ownership and control, as well as a lengthy process to meet regulatory requirements.

Advantages and Disadvantages of Equity Financing

Equity financing offers several benefits and drawbacks for businesses, which should be carefully considered before choosing this method of raising capital. One of the primary advantages of equity financing is that it does not require repayment, allowing businesses to reinvest any profits back into the company without the burden of monthly loan payments. Additionally, equity financing can provide access to investor expertise and connections, which can contribute to the company’s growth and success.

On the other hand, equity financing may involve a potential loss of ownership and control, as investors become partial owners of the company. Furthermore, the pitching process can be time-consuming and may require a significant amount of effort to convince potential investors of the company’s value and growth potential.

Ultimately, businesses should weigh the pros and cons of equity financing and determine whether it aligns with their goals, resources, and risk tolerance.

Pros of Equity Financing

The benefits of equity financing include:

• Lower financial risk, as there is no repayment obligation
• Access to investor expertise and connections that can help grow and support the business
• Improved cash flow, as businesses are not required to make monthly loan payments or interest payments, freeing up funds for other operational expenses and investments.

Furthermore, equity financing can potentially increase the company’s valuation, making it more attractive to additional investors or acquirers. By partnering with experienced and well-connected investors, businesses can also gain access to valuable resources, networks, and industry knowledge that can help drive their growth and success.

Cons of Equity Financing

While equity financing offers several advantages, there are also potential drawbacks to consider. One of the most significant disadvantages is the potential dilution of ownership and control, as investors become partial owners of the company. This can lead to conflicts of interest and differing opinions on the company’s direction, which may ultimately impact the business’s success.

Additionally, the process of pitching to investors can be lengthy and time-consuming, requiring a significant investment of time and resources to prepare a compelling pitch and business plan. Moreover, there may be additional financial burdens associated with equity financing, such as:

• legal and regulatory costs
• dilution of ownership
• loss of control
• increased reporting and compliance requirements

These factors can further strain a company’s resources and impact its overall profitability.

Obtaining Equity Financing: Strategies and Best Practices

To successfully obtain equity financing, businesses should prepare a strong pitch and business plan, and be aware of the best practices for approaching potential investors. Crafting a compelling pitch is crucial, as it will help communicate the value of the business, its growth potential, and the benefits of investing to potential investors. Additionally, a well-structured business plan is essential for securing equity financing, as it demonstrates the company’s strategy, financial projections, and market analysis to potential investors.

When approaching potential investors, it is important to:

• Be prepared, adaptable, and open to feedback
• Tailor your pitch to your audience and consider the investor’s perspective when presenting your business proposition
• Familiarize yourself with the legal and regulatory requirements surrounding equity financing
• Be prepared to negotiate and discuss the terms of the deal with potential investors

Preparing Your Pitch

A compelling pitch is essential for attracting investors and should clearly communicate the value of the business, its growth potential, and the benefits of investing. When preparing your pitch, include:

• A comprehensive plan
• Detailed market analysis
• Accurate financial data
• A persuasive argument for why the investor should fund your business

It is essential to demonstrate an in-depth knowledge of your business and the market, as well as being honest and prepared for constructive criticism.

Make sure to tailor your pitch to the specific audience and consider the perspective of the investor when presenting your business proposition. Here are some key points to include in your pitch:

• Showcase the unique value proposition of your company
• Highlight its competitive advantages
• Emphasize the potential for significant returns on investment

By including these elements, you can make your pitch more appealing and increase your chances of securing equity financing.

Building a Strong Business Plan

A well-structured business plan is crucial for securing equity financing, as it demonstrates the company’s strategy, financial projections, and market analysis to potential investors. When building your business plan, ensure that it includes:

• A clear and concise executive summary
• A detailed description of your products or services
• An in-depth market analysis
• A comprehensive marketing strategy
• Accurate financial projections

Additionally, outline the terms of the equity financing, including the percentage of ownership being sold and the expected return on investment for investors. This information will help potential investors assess the risks and rewards associated with investing in your business and make an informed decision regarding their involvement.

Real-Life Examples of Equity Financing

Examining real-life examples of successful equity financing deals can provide valuable insights and lessons for businesses seeking to raise capital through this method. One such example is the popular ride-sharing company, Uber, which secured equity financing from venture capital firms and angel investors to fuel its rapid growth and global expansion. This funding allowed Uber to invest in technology, marketing, and operations, ultimately leading to its position as a dominant player in the ride-sharing market.

Another example is the crowdfunding platform, Kickstarter, which has enabled thousands of small businesses and creative projects to raise funds through equity financing by allowing individuals to invest in exchange for various rewards and incentives. These examples illustrate the power of equity financing in helping businesses grow and succeed, highlighting the potential benefits and opportunities it can offer to small businesses.

Regulatory Considerations for Equity Financing

Companies seeking equity financing must be aware of the regulations and requirements set by securities authorities to protect investors and ensure compliance with the law. These regulations may include the need for an offering memorandum or prospectus, which provides extensive information to assist the investor in making an informed decision regarding the financing.

In addition to fulfilling regulatory requirements, businesses seeking equity financing should also be prepared for potential due diligence investigations by investors, which may involve the review of financial statements, contracts, and other relevant documentation.

By understanding and complying with legal and regulatory requirements, businesses can better navigate the equity financing process and increase their chances of successfully securing the capital they need to grow and thrive.

In conclusion, equity financing offers small businesses a valuable alternative to traditional debt financing, providing access to capital without the burden of repayment and allowing for greater flexibility in funding growth and expansion. By understanding the various sources of equity financing, the pros and cons of this funding method, and the strategies and best practices for obtaining equity financing, small business owners can make informed decisions about whether this method is suitable for their unique needs and goals.

As the examples of successful equity financing deals illustrate, this method of raising capital can offer substantial benefits and opportunities for small businesses. By preparing a strong pitch, building a comprehensive business plan, and understanding the regulatory landscape, small business owners can maximize their chances of securing equity financing and unlocking the potential for growth and success that it can offer.

Frequently Asked Questions

What are 3 examples of equity financing.

Equity financing involves raising funds from investors by issuing shares in exchange for capital. Common types of equity finance include angel investment, venture capital and private capital.

Additionally, individual private investors or public offerings may be used as sources of equity finance.

Is equity financing good or bad?

Equity financing can offer short-term affordability and availability, as well as limited risk compared to debt financing. It’s a good option if traditional financing isn’t available due to bad credit, and can help your company’s cash flow and growth potential.

Equity financing can provide a great way to fund your business without taking on too much risk. It can help you access capital quickly and affordably, and can be a great way to grow your business.

What are the pros and cons of equity financing?

Equity financing can provide businesses with large amounts of capital, but can also lead to potential loss of control and dilution of ownership. Additionally, investors may expect high returns on their investments or long-term commitments, which can be difficult for companies to manage.

What is the meaning of equity financing?

Equity financing is the process of raising capital by selling shares of ownership in the company to investors in exchange for cash. This enables companies to fund short-term and long-term projects that promote growth.

What is the difference between equity financing and debt financing?

Equity financing involves selling ownership shares to investors, whereas debt financing requires borrowing money that must be repaid with interest.

Equity does not require repayment, while debt entails monthly payments and interest.

Legal Disclaimer

The information provided in this article is for general informational purposes only and should not be construed as legal or tax advice. The content presented is not intended to be a substitute for professional legal, tax, or financial advice, nor should it be relied upon as such. Readers are encouraged to consult with their own attorney, CPA, and tax advisors to obtain specific guidance and advice tailored to their individual circumstances. No responsibility is assumed for any inaccuracies or errors in the information contained herein, and John Montague and Montague Law expressly disclaim any liability for any actions taken or not taken based on the information provided in this article.

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*debt financing vs. equity financing:.

To raise capital for business needs, companies primarily have two types of financing as an option: equity financing and debt financing. Most companies use a combination of debt and equity financing, but there are some distinct advantages to both. Principal among them is that equity financing carries no repayment obligation and provides extra working capital that can be used to grow a business. Debt financing on the other hand does not require giving up a portion of ownership.

IRA can offer the following services to accommodate virtually any funding needs. In some instances you may need two or more types of funding, such as:

Purchase order financing.

Rapidly mobilize orders and shipments through purchase order financing and letters of credit. Business at the speed of today’s economy.

Equipment Financing

Equipment financing helps you purchase new or used equipment to meet increased demand, enhance operational efficiency and ultimately scale revenue. Receive up to 100% of the equipment purchase price.

Invoice Financing

Free up locked cash-flow by advancing receivables from invoices and contracts. Say goodbye to net-terms and hello to cash today.

Construction Financing

Funding that works with your construction company’s cash-flow cycles. Say “yes” to bids more often and receive funds to mobilize work, hire subcontractors, and purchase materials.

Debt Financing*

When a company borrows money to be paid back at a future date with interest it is known as debt financing. It could be in the form of a secured as well as an unsecured loan. A firm takes up a loan to either finance  working capital, expansion or an acquisition.

Equity Financing*

Equity financing is the process of raising capital through the sale of shares. Companies raise money because they might have a short-term need to pay bills, or they might have a long-term goal and require funds to invest in their growth. By selling shares, a company is effectively selling ownership in their company in return for cash.

Merchant Cash Advance

A merchant cash advance (MCA) isn’t really a loan, but rather a cash advance based upon the credit card sales deposited in a business’ merchant account. A business owner can apply for an MCA and have funds deposited into a business checking account fairly quickly—sometimes as quickly as 24 hours after approval.

Key Takaways

• There are two types of financing available to a company when it needs to raise capital: equity financing and debt financing.
• Debt financing involves the borrowing of money whereas equity financing involves selling a portion of equity in the company.
• The main advantage of equity financing is that there is no obligation to repay the money acquired through it.
• Equity financing places no additional financial burden on the company, however, the downside is quite large.
• The main advantage of debt financing is that a business owner does not give up any control of the business as they do with equity financing.
• Creditors look favorably upon a relatively low debt-to-equity ratio, which benefits the company if it needs to access additional debt financing in the future.

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Equity Financing

Table of contents, what is equity financing, how does equity financing work.

• Preferred shares; and
• Convertible preferred stock

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It’s simple, free, and won’t negatively impact your credit., beware: large dividends can get expensive real fast, sources of equity financing, equity financing vs. debt financing: what’s the difference.

• Regardless of how well your business is doing,  you owe that lender their money back , plus interest.
• Lenders will  require collateral , like real estate or a vehicle, to ensure that if you default on the loan, they still have a way to recoup their money.
• There’s really  no way to get out of repaying a loan  and it can hurt your cash flow for years.
• Equity financing  does not require you to take on debt or make monthly loan payments  to repay a lender (a major selling point for most new small business owners).
• If your business does very well,  you will end up owing an investor a lot more if you want to buy them out  and regain ownership of your company.

Choosing Between Debt and Equity Financing

Types of equity financing, 1. individual private investors.

• Debt vs. Equity Financing: What’s Best for Small Business?
• How to Finance a Partnership Buyout

2. Venture Capitalists

3. angel investors, 4. public offering.

• They can be tedious, costly, and time-consuming.
• They may not serve your actual growth if you cannot afford to spend the effort to get one. The eligibility of your business for an IPO depends on which sector you operate in.
• Your annual revenues will play a big role in eligibility (bad for businesses that have irregular cash flow).
• The Internal Revenue Code may layout its own set of requirements for your business.

Pros and Cons of Equity Financing

Pro: low financial risk to business owner, pro: investor connections & expertise.

Get Approved in Just 24 Hours

Pre-qualify for up to $400,000 in small business funding quicker than driving to the bank.

Con: Losing Part Ownership in Your Company

Con: pitching potential investors, con: investors share profits, 4 reasons to use equity financing, 1. funding a startup.

• Finding a location
• Training staff
• Purchasing equipment

2. Financing Risky Businesses

3. managing debt, 4. building valuable connections, what to do before seeking an equity investment, faqs about equity financing, how does equity financing work.

Equity financing works by offering ownership stakes in a business to investors in exchange for capital. Businesses seeking equity financing typically go through a fundraising process, where they pitch their business ideas and growth potential to potential investors. 

If the investors are interested, they negotiate and agree upon the terms of the investment, such as the percentage of ownership and the amount of capital to be invested. Once the agreement is reached, the investors contribute the funds to the business, becoming shareholders and sharing in the risks and rewards of the business’s performance.

What are examples of equity financing?

Examples of equity financing include angel investments, where individuals provide capital in exchange for equity, and venture capital investments, where venture capital firms invest in high-growth potential startups in exchange for equity. 

Private equity firms also participate in equity financing by investing in established businesses and helping them grow and improve operations. 

Is equity financing a loan?

No, equity financing is not a loan. Unlike debt financing, where businesses borrow funds that need to be repaid with interest, equity financing involves selling ownership stakes in the business. Investors become shareholders and have a stake in the future success of the business. They share in the profits and losses and may have voting rights and influence over key decisions. 

Equity financing does not require repayment like a loan but instead provides investors with the potential for a return on their investment based on the business’s performance.

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What is equity finance?

Learn more about the most common forms of this type of finance and which businesses they are most suited to.

Equity financing is when you raise money by selling shares in your business, either to your existing shareholders or to a new investor.

This doesn’t mean you must surrender control of your business, as your investor can take a minority stake.

Common equity finance products include angel investment , venture capital, and private equity .

Read on to learn more about the different types of equity financing.

As with all finance types, it’s a good idea to seek independent financial advice to help decide which type of finance is right for you and your business.

Angel investment +

What is angel investment.

An angel investor is someone — usually an entrepreneur or successful businessperson — who invests their own money in your small business to help it grow.

They do this in exchange for a minority stake (typically 10% to 25%).

As well as providing financing, they also take a close interest in your business’s future.

They will look to forge a strong relationship with you and use their experience, knowledge, and contacts to make sure your company thrives.

Which businesses are attractive to angel investors?

Generally, angel investors get involved at an early stage, when a business is about to launch or has recently launched.

They look for businesses that:

• have much potential for quick growth
• will give them a high return on their investment.

An angel investor might see your business as a viable prospect if you:

• are pre-revenue, pre-profit or profit-generating
• have a yearly turnover of less than £5 million
• are based in an area of which they have local expertise.

If your business is generating revenue (pre-profit) or profit, an angel investor is likely to see you as a good investment, in that there’s a strong chance you’ll deliver a high return.

If you’re a pre-revenue business, you’ll likely need to show ‘proof of concept’, as the investor will consider you a higher risk.

Proof of concept means being able to demonstrate that your product works or that there is strong demand for it.

It might also mean having patented or copyrighted intellectual property.

How can my business attract angel investment?

You’ll need to prove your value to any angel investor.

This means doing lots of research and networking, and perhaps writing a detailed business plan.

If you meet the investor’s requirements, you must pitch to them to get them on board.

You can expect the entire investment process to take up to six months.

Learn more about angel investment and whether it’s suitable for your business.

Venture capital +

What is venture capital.

Like angel investors, venture capitalists (VCs) finance early-stage businesses to help them grow.

However, rather than invest their own funds, VCs use money belonging to large institutions such as pension funds.

As they seek a significant return on their investment, they generally ask for a bigger stake in exchange.

While VCs likely won’t take part in the day-to-day running of your business, they will look to be involved in other ways, particularly when it comes to determining your strategy and direction.

Often this means taking a seat on the board.

Who is venture capital suited to?

VCs are most interested in businesses that:

• have a track record of success
• have the potential for rapid growth
• are likely to generate a large profit on any initial investment.

They tend to target businesses whose products or services have a unique selling point and give them a clear advantage over their competitors.

What are equity funding rounds?

You raise venture capital in a series of stages (or rounds), and most VCs specialise in one specific stage of investment.

Start-up/pre-seed stage

For start-ups or new companies to develop products and/or conduct some initial marketing.

VCs rarely enter at this stage. Most start-ups finance this stage themselves.

Seed stage/early stage

For companies to refine their product or develop their concept, before bringing the product to market.

VCs who work with early-stage and micro businesses enter at this stage, and often invest in businesses local to them.

Series A stage

For revenue-generating companies to do things such as finalise their product, pay staff salaries or conduct market research.

At this stage, VCs provide investment in return for equity.

Series B stage

For profit-making companies that want to scale up, expand, increase their market share or branch out into other product ranges.

Most of this finance will come from established VC funds.

Series C stage

For companies with huge potential or market traction to do things such as gain a greater market share, develop more products, or prepare for a buyout or an IPO.

Not all VC funds will take part at this stage, and the ones that do will effectively treat it as their exit strategy for their investment in the business.

Learn more about equity funding stages .

How does a business attract venture capital investment?

VCs are in high demand and don’t typically advertise themselves.

The best way to find one is to have someone they trust — such as a colleague, another entrepreneur or investor, or a lawyer — set you up with an introduction.

Alternatively, you could contact the British Venture Capital Association (BVCA) Link opens in a new window , who can point you in the right direction.

Securing VC investment can be a long, drawn-out process.

You’re likely to incur legal fees, whether you manage to secure that investment or not.

As a result, you must enter into the process fully prepared.

Learn more about venture capital and whether it’s suitable for your business

Corporate venture capital +

What is corporate venture capital.

Corporate venture capital is a type of venture capital.

Where venture capital is financed by institutions such as pension funds, corporate venture capital comes from large, often multinational corporations.

A corporate venture capitalist (CVC) will provide funding in exchange for a stake in your business.

It will also typically offer you its expertise, network, and contacts.

What type of business is corporate venture capital suited to?

CVCs want to benefit strategically from any relationship they build.

This is why they tend to invest in smaller businesses that operate in the same or a similar industry to them.

They will look to gain from your business in some way, whether that’s through, for example:

• your special insight into the marketplace
• your market reach
• some innovative technology you’ve created.

If your business can’t help the CVC develop its strategy, the CVC is unlikely to offer you investment.

Like venture capital, you raise corporate venture capital in a series of stages (or rounds).

CVCs rarely enter at this stage. Most start-ups finance this stage themselves.

CVCs who work with early-stage and micro businesses enter at this stage, and often invest in businesses local to them.

At this stage, CVCs provide investment in return for equity.

Most of this finance will come from established CVC funds.

Not all CVC funds will take part at this stage, and the ones that do will effectively treat it as their exit strategy.

While VCs generally invest in cycles of five to 10 years, CVCs tend to invest in shorter cycles of three to five years.

How can a business get corporate venture capital?

Like VCs, CVCs are in high demand.

However, CVCs tend to be more proactive in seeking out potential investments, attending networking events and accelerators in order to better understand the current business landscape.

Another way to get CVC funding is via an introduction from an existing investor or an entrepreneur with close ties to the CVC.

Learn more about corporate venture capital and whether it’s suitable for your business.

Private equity +

What is private equity.

Private equity (PE) firms raise capital from institutional investors such as pension funds and insurance companies.

With that money — and some of their own — they form a private equity fund, which they use to invest in businesses.

Their aim is to increase the value of those businesses then sell them (or their stake in them) for a profit.

The most common type of PE investment is the leveraged buy-out .

The PE firm buys a majority stake in your business using a combination of equity and a large amount of debt.

Although repaying the debt falls on the business, the investor uses its operational expertise and sound management to boost your company’s profitability, and reduce the debt as a result.

PE firms typically manage their investment for a period of years, after which time they either sell (often to another PE firm) or list the company on the public market.

Which type of business is private equity suited to?

As PE firms want to make substantial profit on their investments, they usually target mature, well‑established companies in traditional industries. Your business might be a good candidate if:

• it’s successful and profitable and showing consistent growth
• its founders are looking to exit it
• it has the potential to increase profitability.

Private equity is about large investments.

A PE firm might consider your business if you:

• are mature and growing
• are profitable
• have an annual turnover of £10 million–£100 million.

How can a business attract private equity investment?

With private equity, the initial approach is often made by the investor, through intermediaries such as lawyers, investment banks or advisers. Sometimes they approach businesses directly.

However, there’s nothing stopping you from approaching a PE firm yourself, though you might want to seek independent advice from your accountant or financial adviser first.

Learn more about private equity and whether it’s suitable for your business.

Equity crowdfunding +

What is equity crowdfunding.

Equity crowdfunding is when you raise money by listing your business on a regulated online platform.

This allows investors and members of the public to buy shares in your company.

There are several crowdfunding platforms in operation and each one has different methods and specialities.

When you apply to take part, the platform will carry out checks to make sure your business complies with its requirements.

Some platforms can also offer advice or manage your communication with your shareholders.

Which businesses can benefit from equity crowdfunding?

Equity crowdfunding generally suits businesses that sell consumer products or services, as these are the companies in which the public frequently look to invest.

That said, equity crowdfunding platforms are very diverse, and by doing proper research you should be able to find one that’s a good fit for your business.

Equity crowdfunding is aimed at a wide range of businesses, from those that are pre-revenue through to more established companies.

There are no requirements relating to annual turnover.

As all equity crowdfunding in the UK is regulated by the Financial Conduct Authority (FCA), there are rules that determine how much you can raise and how much people can invest.

If your crowdfunding goes beyond €5 million, you must produce a prospectus, which the FCA will need to approve.

How can a business attract equity crowdfunding?

You can find information about equity crowdfunding platforms on the website of the UK Crowdfunding Association (UKCFA) Link opens in a new window .

It’s important to take the time to find the right crowdfunding platform for your business.

Keep in mind that platforms will do their due diligence and expect you to have your financial information in good order.

You’re also likely to face questions from potential investors.

Learn more about equity crowdfunding and whether it’s suitable for your business.

Initial public offering (IPO) +

What is an ipo.

An IPO is when your business raises finance publicly for the first time.

This is often referred to as ‘listing’ or ‘floating’ on the public market, which, in the UK, is the London Stock Exchange.

Raising money publicly in this way allows you to secure large amounts of investment without giving up control of the company — you can have many investors, each holding small minority stakes.

You can also repeat the process time and time again, over a period of years.

Once your business goes public, you have a responsibility to regularly update your shareholders and the market with your financial information.

Which type of business is an IPO suited to?

If your business is established, profitable and growing, and has plans for further growth, an IPO could be feasible. As well as financing growth, listing shares in your business on the public market can help you to:

• finance acquisitions
• rebalance your balance sheet
• broaden your company’s shareholder base
• provide liquidity.

There are different requirements depending on the market on which you list. The three major IPO markets are as follows:

Main Market

For larger businesses. Home of FTSE 100 and 250.

High Growth Segment

For tech-specific businesses not quite ready for the Main Market.

The Alternative Investment Market (or AIM) is designed for smaller, growing businesses looking to scale up.

Technically, there’s no limit to the amount of capital available, although how much investment you can secure will depend partly on the rules of whichever IPO market you choose.

The AIM market enables you to raise up to £200 million, while the Main Market gives you access to over £1 billion via a much wider pool of investors.

Learn more about AIM .

How can I seek an IPO listing?

Generally, there are two phases to seeking a listing:

• Pre-IPO preparation
• The IPO process itself.

Preparing for an IPO might involve:

• reviewing your business plan
• assessing your management team
• recruiting accountants, lawyers and PR resources to support throughout the process
• appointing a board
• implementing or tightening financial controls
• improving operational efficiency.

Once you’ve listed your business, you must then comply with the rules around how public companies should operate. This includes producing financial statements and adopting corporate governance codes that will dictate how to engage with shareholders.

Learn more about IPOs and whether they are suitable for your business.

Expansion capital +

What is expansion capital.

Expansion capital (also known as growth capital or growth finance) is money invested to enable your business to accelerate its growth without you having to surrender control or ownership.

Expansion capital firms can provide investment in return for an equity stake (between 10%–40%) and usually a seat on your board.

One of their main aims is to grow your business by around 15%.

Which businesses can attract expansion capital?

Expansion capital investors target businesses with lots of potential for growth, in the form of a highly scalable product or service.

They look for ambition and long-term vision, and might also want to see a strong business plan.

An expansion capital investor might see your business as a good investment if you:

• are profitable and growing
• have an annual turnover of £5 million–£100 million.

How does a business attract expansion capital?

Applying for funding can be time-consuming.

You must be properly prepared, as expansion capital firms will want to examine your financial reports and plans for growth and assess the legal framework of your business.

There are a number of places you can go for expansion capital, including:

• expansion capital firms
• high net worth individuals.

Often, securing funding will mean delivering some kind of pitch.

You’ll need to show evidence of your potential for growth and demonstrate why your business is worth the investment.

Learn more about expansion capital and whether it’s suitable for your business.

Find growth finance options +

Answer six simple questions to understand more about the growth finance options available and whether they're suited to your business.

Visit our Finance Finder tool .

Regional support

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Finance Hub Guidance and information

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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

Making business finance work for you

Starting a business doesn’t come with a set of instructions.

We know that understanding the many different types of financial product in the marketplace can be difficult.

Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.

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