How can a company seek equity?
Where does equity come from?
The two primary methods used by businesses in the UK in order to obtain equity financing are:
Private placement of stock with investors; and
Venture capital firms and public stock offering.
Startups tend to choose private placement and investors to obtain their funding, as it is generally a more straightforward process.
Who can the company sell shares to?
Those who can buy shares in a company are:
Individuals.
Other companies.
Existing shareholders.
Employees.
Institutional investors.
How can a company seek equity from these groups?
Offering shares to the public
Public companies can offer shares to the public, when first selling shares, this is referred to as an Initial Public Offering. . This is done by trading the shares on a recognised stock market. The key steps to follow are listed below:
Choose a market and a transaction type;
Choose advisers;
Prepare an application;
Market to investors;
Launch.
Some advantages of offering shares to the public are raising capital and the increase of public awareness when offering shares to the public. On the other hand, there are some disadvantages, such as the need to comply with regulatory requirements, which can be high.
Offering shares to investors
Equity can be obtained from investors by both public and private companies.
This method can be favourable to companies in the development stages that are not making immediate money. The practicality of this is there is no immediate requirement to pay back the investor, unlike a loan, as the investor is paid in dividends later on as the business becomes profitable.
The downside to offering shares to investors is the risk of existing shareholder ownership becoming diluted which could result in potential loss of control over the company. New shareholders may not resonate with the message of the company and its ethos, and may have differing opinions on business strategies which could lead to conflicts. Finding investors during the early stages of a business may, however, be difficult due to being in the initial stages of development, and therefore not yet a recognisable company within the industry.
An advantage of offering shares to investors is the fact that it helps develop the business further, as it increases the cash flow to reinvest it in the future.
Offering shares to employees
There are a number of ways to offer equity to employees as part of Employee Share Schemes, the most common tends to be:
Shares.
Options: give the employee the right to buy the shares in the future.
Benefits of offering equity to employees as a startup include:
Increase in productivity and performance by employees.
It encourages employees to commit to the company in the long run and helps retain employees.
It strengthens corporate culture and team cohesiveness.
It attracts top talent in terms of new employees.
Employees and businesses can profit from employee equity programs like EMI's tax advantages.
Giving out stock to other stakeholders reduces the amount available to the founders, but they receive knowledge, dedication, and perspective in return, increasing the likelihood of success.
Drawbacks of offering equity to employees as a startup include:
Potential dilution of share ownership, which could cause conflict if these employees have differing opinions on business development, for example. understand the significance of the company and the goals that are trying to be achieved.
The process of setting up share options can be complicated and incur administrative costs.
Increasing share values relies on a whole-company effort.
Could result in a reduction of the value of existing shares.
While offering equity to employees can be beneficial, it’s a decision to be taken wisely, and the company should decide whether it should invest in long-term employees or long-term financial partners.
Author: Irene Correro Garcia -
Author: Irene Correro Garcia -
In partnership with
DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
