How does equity
financing work and
what does it involve?
Equity Finance refers to a company’s ability to raise capital by selling a proportion of its shares. In the early days of a business the friends and family of the owner may be able to invest and provide the needed capital. Later, professional investors, may have greater resources and be able to provide larger sums.
An investor receives a percentage of the company and becomes a partial owner. This usually gives them a share of the company’s profits and perhaps some decision-making authority. The money raised via equity financing will not be required to be repaid to the investor.
An equity investor will usually a greater say in the management of the business than a lender but may be able to add significant business experience. They will always seek a higher return on their investment than will a lender. Legal costs can quickly become complex, and costs ramp up.