Equity Financing

Definition

Equity financing is the act of financing your business by means of selling stock or ownership in your company. By selling equity in your company, you are giving up a security factor that represents ownership of the business in exchange for finances. Investors tend to own these equity shares as either common stock or preferred stock.

Benefits

1. Reduce Primary Debt: Unlike Debt Financing, you do not have to continuously make large payments of money back to your investors. You can use your finances right away without the obligation of creating a repayment plan.

2. No repayment obligation: Should your business fail, you are not obligated to pay your investors back. They invested in the company itself and thus, you do not need to repay the initial investment.

Drawbacks

1. Loss of Control

Your investors will own a piece of your business through equity financing and depending on what type of stock they have received, they may have voting rights on how your business is to be controlled. Going further, you must consider that every business transaction acts in favor of your investors’ best interests as to avoid lawsuits.

Common Types

1. Friends and Family Financing

2. Angel Investors

3. Angel Investor Groups

4. Venture Capital Firm

5. Corporate Investors

6. Private Equity Firms