Research shows that one-third of small business owners feel a major debt burden.
If you’re at the helm of a fledgling enterprise, you might not know all of the financing options that are available to help you find your footing without going into the red.
One of those options is equity financing. Today, we’re taking a look at this strategy and how to approach it the right way.
Ready to learn more? Let’s dive in!
What is Equity Financing?
Equity financing is a business strategy where owners sell shares in their company to raise funds. This usually happens in the early stages of the company’s development.
In exchange for selling portions of their total ownership, these owners receive capital that they can then reinvest in their business.
Though the two can sound similar, equity capital is different from other types of financial capital, including debt capital.
With the latter, a business owner borrows money from a lender to grow his business, maintaining full ownership rather than selling any of it.
How Do the Shares Work?
Most business shares sold in an equity financing transaction are common stock. One single share represents one unit of ownership.
Say, for instance, that a company has 5,000 shares. As the business owner, you might retain 50% of those shares, giving you 2,500.
If you choose to go the equity finance route, you can then sell the remaining 50% to any interested investors who want to offer capital for your startup. In exchange for investing in your company, they become a shareholder in it.
Types of Investors
Where do these investors come from, anyway?
There are a few different types of people interested in helping startups and small businesses succeed. A few of the most common ones include:
These are wealthy individuals who fund promising businesses in their early stages.
From a trusted family friend to a financial advisor or someone you meet through an entrepreneurial network, anyone can be an angel investor. They just have to have time, money, and dedication to your cause!
Venture Capital Firms
Think of these firms as a collection of angel investors.
They’re companies with the sole mission of trading equity for capital. In most cases, they’ll distribute funding in rounds that progress as your company grows.
Advantages to Investors
As a business owner receiving investment funds, it’s easy to see the advantages of equity financing from your perspective. Yet, why would an investor want to pursue this option?
The answer is simple.
As a shareholder in your business, every investor also owns a portion of it. That means they will benefit from all of the dividends that those shares generate. In addition, they could also make a profit if those shares are later sold.
They also receive non-monetary perks, as well. Most shareholders are invited to attend company board meetings and voice their opinions on issues at hand.
If an investor buys common stock, he or she can also receive certain voting rights in major corporate decisions. If your company issues preferred stock instead, those investors will retain dividend rights but no voting rights.
Is Equity Financing Right For You?
Are you struggling to get your small business off the ground? You don’t have to carry a debt burden to do so.
Equity financing is one of many options that can help your company grow and succeed like you know it can.
To learn more about business loans, get in touch today. Let’s take this next step together!