Equity finance

Equity finance refers to the capital an external investor injects into your business in return for a share of ownership (equity) and/or some control of the business. Equity finance investors therefore have a claim on your future earnings but, in contrast to a loan, you don’t pay any interest – nor do you have to repay capital.

If you opt for equity financing, you’ll sell a stake in your business in return for funds. This is in contrast to debt financing (e.g. a loan or a bond) where you take out a loan and pay it back over time with interest.

Equity finance could suit your business if you have an expansion plan or project that lenders such as banks aren’t willing to support, or if you want to avoid loan payments.

Your journey from startup to successful business might involve multiple rounds of equity financing from different types of investors – and at each stage you might choose different equity instruments. For example, business angels and venture capitalists may ask for convertible preferred shares rather than common equity because the former have greater upside potential (and some downside protection). If your businesses ends up growing large enough to go public, it would be common equity that you’d sell to institutional and retail investors.

If your business goes bankrupt, equity investors (equity holders) are the last in line to receive money. Because equity investors share the risks your business faces, equity finance is often referred to as risk capital.

Equity finance has two obvious advantages for businesses:

• private investors can bring additional skills and knowledge to your business – plus a useful network contacts 
• your investors, not least because they share in any upside, are motivated to make your business a success – and will be more likely to provide follow-up funding.

There are six main types of equity finance:

• business angels
• venture capital
• private equity
• equity crowdfunding
• the government’s Enterprise Investment Scheme (EIS and SEIS) and VCTs
• initial public offering (IPO).

You might also consider family offices and Tier 1 investment.