What is equity finance?

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 business fails.
  • Instead, you give the investor a share of your business and they have some level of control in the business.

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 give up
  • 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

Advantages

  • 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

Disadvantages

  • 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 control.

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 of control.
  • Be realistic: if you don't want to lose 50% of the business, don't do the deal

Checklist

  • 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 realistic
  • 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

FAQ

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 parties.

Jargon buster

Risk capital: another term for equity investment

USP: unique selling point

Resources

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