When is the Right Time to Seek Equity Financing?
When it comes to business, in simple terms, equity is the money that would be left for shareholders or owners after selling all assets and paying off debts. In public companies, it belongs to shareholders, and in private companies, it belongs to the owners.
When should a business seek equity?
If a business decides to seek equity financing, they raise money by selling shares in the business, this can be done either to existing shareholders or to new investors.
However, as a startup, when starting the business, the founders will own 100% of the business, and for growth, exchanging equity for funding may act as an incentive and make the business more appealing for investors.
Offering equity to new employees is a great way to compete with big competitors who are able to offer bigger salaries. Some benefits of offering equity to employees, both for the workers and the business, are:
Align employees with company goals.
Encourage long-term commitment.
Improve team dynamics.
Attract talent.
Offer tax benefits, like EMI.
Exchange equity for valuable expertise and commitment.
Some common situations where a business might consider offering equity are rapidly growing companies, capital-intensive projects, pre-IPO companies, mergers and acquisitions, employee incentives, financial restructuring, and strategic partnerships. In the case of startups and early-stage companies with high growth potential and limited financial resources, this method of funding is available to fund growth and development.
What are the benefits and cons of seeking equity at this stage?
There are several reasons why startups may require equity funding during the early stages of the business, the most important being that it can provide the large amount of initial capital that is required when creating a new business. This method of funding can help not only to attract potential investors but to validate the business model. As this method of funding does not require any type of loan to be paid, it helps the startup team to focus on building the business instead of worrying about how to pay off any type of debt.
One of the biggest advantages of this funding method is that equity allows the business to keep control of their company and can insulate the business from some of the risks associated with the early stage. It is important however, to acknowledge one of the largest disadvantages - that by issuing shares in exchange for capital this may result in diluting the ownership percentage for existing shareholders. Furthermore, If the inventors want to sell their shares this could result in a loss of control for the startup team.
Author: Irene Correro-Garcia -
Author: Irene Correro-Garcia -
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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
Raisin, 'Equity: everything you need to know' (Raisin, 2023) <https://www.raisin.co.uk/investments/equity/#:~:text=Equity%20is%20defined%20as%20the,if%20the%20company%20is%20private.> accessed 28 July 2023
British business bank, 'What is equity financing?' (British Business Bank, 2023) <https://www.british-business-bank.co.uk/finance-hub/what-is-equity-finance/> accessed 28 July 2023
https://www.investopedia.com/terms/e/equityfinancing.asp#:~:text=Companies%20use%20two%20primary%20methods,firms%20and%20public%20stock%20offerings.
