When you choose the route of equity financing, you raise money in exchange for shares in your business. Investors who finance you in exchange for shares are also buying ownership rights to the company, based on the percentage of shares they’ve purchased.
Equity financing seems like a tricky process to navigate, doesn’t it? If you’ve reached a point in your business where you’re willing to raise capital by giving up some equity, it’s crucial that you thoroughly research the process and inform yourself of the pros and cons.
In this article, we’ll help you gain a better understanding of what happens when you opt for equity financing.
1. Ownership Dilution and Control
When you sell your business through shares, your ownership percentage becomes smaller. This also affects how much control you have over business decisions.
An investor may want a seat on the board or the right to approve certain strategic moves. This can change how quickly and independently you act.
The best way to manage this is through a strong shareholder agreement. Such agreements can protect your ability to guide the company while still giving investors a voice.
2. Investor Expectations and Returns
Equity investors are not silent backers. They expect returns on their investment. These returns can be in the form of dividends, fast growth in company value, or an eventual sale of the business.
The time frame for these returns matters. Some investors want quick results. Others are patient but still expect a profitable exit. Aligning your business plan with these expectations is key to a healthy investor relationship.
3. Long-Term Business Implications
Equity financing shapes your business in ways that last for years. Here’s how:
Future Fundraising: New funding rounds often depend on the valuation set during earlier equity deals. Investors will watch how you meet growth targets before committing more capital.
Valuation Discipline: Bringing in equity forces you to set a realistic company value. This process can improve financial discipline and focus on growth drivers.
Strategic Direction: Investors may influence the direction of the company. This guidance can be helpful, but it may also create limits if your visions differ.
What Are the Types of Equity Investors?
There are many types of equity investors that you can approach to finance your business. These investors are:
Individual Internal Company Investors: You can sell some of your shares to internal company staff, provided that they have the capability to do so.
Equity Crowdfunding: This is when you list your business on a regulated platform and set up a specific percentage of shares that you’ll share across the investors and members of the public.
Venture Capital (VC): VCs chase potential and target businesses that show promise for exponential growth. Venture capital firms can provide large investments. However, the downside is that the capital injections come in exchange for significant equity and returns.
Angel Investors: Angel investors are typically professionals who are well-off and want to invest using personal funds. These investors offer access to beneficial networks. Additionally, you can access mentorship.
Public Equity via Stock Market Listing (AltX / JSE): Listing on AltX is another way to raise a significant amount of capital. However, due to the inaccessibility, high listing costs, and limited awareness, it is typically not a go-to option for SMEs.
Hybrid Structures: Some deals use convertible notes or staged equity releases. This can delay valuation discussions and link equity release to performance milestones.
4 Key Aspects to Remember Regarding Equity Financing
1. Be Investor Ready
Many businesses wait until they are under financial pressure before seeking equity. This weakens your bargaining position. Having clean financial records, strong governance, and a credible leadership team can improve your terms.
2. The “Missing Middle” Needs Creative Solutions
Medium-sized businesses often fall between small grant programs and big corporate funding. Equity can fill this gap, but it requires careful preparation and targeted investor outreach.
3. Public Equity Has Hidden Costs
Listing on AltX needs a minimum share capital and a track record. Mainboard listing has even higher requirements. Many businesses underestimate these barriers.
4. Non-Bank Financial Institutions (NBFI) Can Help
Even if they do not provide equity, NBFIs can help with short-term funding. This can free up cash flow while you work on equity deals.
