This week, we would look at how to raise equity financing. This is a topic for businesses, which we have already touched upon in our blog ‘Equity as source of finance.’ But as we are coming to the end of the year period when companies make their financial projection for next year, we feel it is important to review it.
Equity financing
When a company wants to raise funds, it can use equity financing, which involves selling shares to both new and current investors. Selling shares entails giving investors, also known as shareholders, a small ownership position in your company. Financing through equity can be achieved through the private selling of shares to investors or through initial public offerings (IPOs) of common stock.
Sources of equity financing
There are several options and sources that a company may raise funds from. These include:
Angel investors - These are often financially wealthy people who provide first seed money in exchange for an ownership share in a startup company. They often don't take part in business operations on a daily basis. They often invest in order to receive a high rate of return on their capital.
Venture capitalists - These are professional investors and firms that make investments in businesses that have high growth potential for success. They also like to participate in day-to-day activities and they typically invest early and leave at the IPO stage when they can get big profits.
Crowdfunding - Crowdfunding is when a group of angel investors pool their resources to make modest investments—as little as $1,000—through an internet platform to help a business reach particular funding goals or support a company's financial objectives. Websites for crowdfunding include Crowdfunder and Kickstarter.
Initial public offerings (IPO) -This is when a more seasoned and established company receives capital by offering stock to the general public. Due to the cost and effort involved, this source is often done later in the life of a company. It is not a good idea for start-ups or smaller businesses to use this type of equity financing.
Advantages and disadvantages
The advantages include that the money invested will not need to be paid back and you can also acquire advice, resources, and business know-how from your investors. Investors will be eager to support your success because they desire a return on their capital and if the company does not make a profit, the investors bear the financial risk. The disadvantages include investors will receive a share of your company's ownership. You will have to distribute investors' profits from the company. You will not have complete authority or control over your decisions, i.e. before you make any major moves, you will have to get the support of your investors and this could end up costing you more than lender financing.
If you require advice and support on how to determine which choice from the list above best meets your company's objectives, please email our finance experts at enquiries@ovacgroup.com