Investing in companies can result in people quickly being overwhelmed by a number of terms such as equity financing. Even if you are looking to grow your business you need to know the differences between equity financing and other types. So we have rounded up the salient features of equity financing and even some of its pros and cons.
The Nuts and Bolts of Equity Financing
Selling company stock at a price per share to investors and giving up a piece of the ownership pie to them in return constitutes equity financing. Usually companies owned by an individual or by a group of people look for investors to buy equity so that they can forgo having to take a loan. With the aid of equity financing the company can grow without having to pay interest on loans or provide collateral for them.
Risks and Rewards of Equity Financing
Putting down money to buy equity in a company is basically risk taking, as most business that want such financing are not yet turning a profit. Businesses that are looking for equity financing are often those that have been formed recently and need to grow or expand to more territories to bring in a profit. The rewarding part of the equity financing is that investors can own a portion of the company over the long term, and even exert some influence on how it operates.
The Role of Angel Investors and Venture Capitalists
Individuals who invest a part of their personal funds in a company are termed as angel investors. Angel investors have a high degree of belief in the product or service a company provides and are extremely interested in ensuring its success. In return for their investment they own a portion of the company and they often provide guidance to help drive growth. Angel investors additionally come together to form groups and some of them focus on investing in tech startups.
Venture capitalists are a different breed of investor and even though they also provide equity financing they represent large funds. Dealing with large investments that amount to several million dollars venture capitalists take up a formal role and usually become a part of the management team once a stake in a company is bought.
Equity Financing from Family
Sourcing equity financing from friends or family members is what most business owners do. The tricky part of this particular path of equity financing is that they have to be treated similar to other investors. They also need to be aware that they might end up losing the money they put into the business.
Putting an Equity Finance Agreement in place
A friend or a family member who provides equity financing or an angel investor should be treated the same. Legal agreements have to therefore be drawn up with anyone providing equity finance and they should be aware of the risk involved.
Creating a successful business means taking advice from equity partners who often times have skills that you do not possess. Business owners however have to walk a fine line when acquiring equity financing and ensure they do not promise too much and end up letting down family and investors. Finally they have to be ready to give up total control over their company and allow others into the decision making process.