Equity Funding can be a good option for businesses requiring additional funding to get started, take the next step or turn a business around.
What is Equity Funding?
Equity Funding raises capital by transferring business ownership interest or equity to investors. The ownership interest usually takes the form of shares.
Equity Funding is often referred to as equity financing, equity loans, or venture capital and can range from a few thousand dollars privately raised, to millions gained in an Initial Public Offering (IPO) on the stock exchange. Equity Funding does not involve taking out loans or borrowing funds through debt financing which makes it a more flexible form of funding.
How does Equity Funding work?
Investors buy a stake in a business that is hoping to expand or requires funds to help it remain viable. Depending on the life stage of a business, investors may be interested in different types of equity.
Angel investors and venture capitalists, for example, will usually invest in start-ups and would prefer convertible preferred shares. Whereas larger, more mature companies may consider a public listing on the stock exchange. Once publically listed, a company can gain further equity funding (or secondary equity financing) through rights offerings or by offering equity units that include warrants.
Equity Funding: Private vs Public
When considering equity funding for your business, it’s important to note that you can raise either private or public equity funding.
Private equity funding involves direct investment in an unlisted company and usually includes the provision of management expertise to help the company succeed.
Public equity funding involves selling equity to the public via the stock exchange. The initial public offering (IPO) will be run by an underwriter who will determine the price of the stock and will assist with selling that stock.
Sources of Equity Funding
There are many sources of equity funding available to businesses who are looking for a cash injection.
- Bootstrapping, or self-funding, where you put personal funds into, and use revenue from the business to help it grow.
- Family and friends will often be willing to lend a hand when your business is starting out. However, remember to consider the impact on your relationships should things go wrong.
- Venture capitalists are typically larger organisations who invest vast amounts of money into businesses, often in the early phase. They will take an active role in the business and expect a high return on their investment.
- Private investors can take the form of individuals with a high net worth, business angels, banks or superannuation funds. These investors are expecting a high return on their investment and will often provide management expertise and support.
- Floating stock on the stock exchange, starting with an IPO, this method involves selling shares in the business on the stock exchange. This process can be complex and can run the risk of raising insufficient capital.
- Grants offer another funding option. The Australian government provides grants to businesses for research and development, innovation, business expansion and exporting.
- Crowdfunding is another alternative for raising equity. Crowdfunding invites people, through online resources, to invest in a business by offering detailed information on the project and budget.
Equity Funding could offer a viable option for raising capital for your business. However, the decision on what type of Equity Funding is suitable for your business will depend on the potential your business has for success, and the maturity (or otherwise) of your business.
PrimaryMarkets is a global, independent, unlisted securities and investments platform and marketplace for sellers, buyers and intermediaries.Contact us to discuss the best options for raising capital for your business.