Equity finance and equity investment
Equity finance is a way of financing your business by
surrendering a certain percentage of it in return for investment.
This guide looks at the first steps and helps you determine if
equity finance is the right way to go for your business
How it works
- Equity finance is a good way of funding a start up as the
money never has to be repaid to an investor.
- However, that means the investor is taking a huge risk and
potentially investing money they'll never see again if your
- Instead, you give the investor a share of your
business and they have some level of control in the
Different types of equity finance
- Sources of equity finance differ enormously: it could be
anything from a friend or relative, to a venture capitalist or even
through the stock markets.
- The type you opt for will depend entirely on your circumstances
and on the level of investment you are looking for.
- Whatever you choose to do, err on the side of
caution: accepting investment from a friend may seem less
daunting than dealing with stock markets, but can be equally hard
if things go wrong.
Is it right for your business?
- If you want to maintain control of your business,
it isn't for you.
- You will need to consider a number of factors before securing
equity finance: remember that you'll be giving up a
slice of your business.
- The larger the investment, the more control you can expect to
- Determine whether you want to combine equity finance with
another form of raising capital: this way you may be able to
retain a greater percentage of your business
- Equity investment is different to a bank loan: you will
not be charged interest or fees on any committed funds
- Once involved, investors will contribute their skills,
knowledge and contacts to your business: they may also be
willing to provide further funding to generate growth
- You may lose a considerable portion of the
business, depending on how much investment you secure.
- You have to be prepared to give up some management
Finding an investor
- There are two main kinds of equity investor:
- Angel investor
- Venture capitalist
- If you are looking for a small amount of money,
you may decide to approach a friend or family member.
- If you are looking for serious investment, then
it's likely you will use someone unfamiliar to you.
- Networking is a good way to find a potential
investor as is word of mouth.
What investors look for
- Fully research your investor to see whether your
business lies in their area of interest.
- Impress potential investors with a good track record and a
good level of expertise in your area.
- Equity investors take a risk on businesses that may fail: you
need to reassure them that your business will succeed:
prepare a convincing pitch; write up a solid business plan; and
convince them there's a market for your business's USP.
- You'll need to show investors their opinions will be
taken into account, and that they will have a certain amount
- Be realistic: if you don't want to lose 50% of the business,
don't do the deal
- Determine how much money you need; then work out whether you're
willing to lose a piece of the business to secure it
- Make sure the plans you have for your business are
- Ensure you business is ready for external investment
- If you are going forward for equity investment, it is a good
idea to seek advice from a business adviser and a lawyer
Where can I find investors?
Networking is a good way to find potential investors: attend
events sponsored by your local Business Link and chamber of
commerce. Speak to friends and business associates about your
venture, too - word of mouth can spark investors' interest and
create a buzz around your company. Associations such as the British
Business Angels Association and the British Private Equity and
Venture Capital Association can help connect you with interested
Risk capital: another term for equity
USP: unique selling point
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