Equity Financing
Equity financing can be a critical part of the capital structure in a startup or small business acquisition. Capital can be obtained through individuals or companies in exchange for a percentage of ownership in the business. You can sell stock in the business to investors which will allow them to share equally in the profits and risks. Structuring a balance equity and debt will be dependent on the short-term and long-term capital needs of the buyer.

Equity financing has the following advantages: The net worth of the firm increases without increasing liabilities. The reduction in liabilities will enhance the creditworthiness of the firm, which can assist in future financing with creditors; Your ability to raise capital will be enhanced due to the increased value of the assets of the company with the stock offering; you can obtain capital without a personal guarantee or security interest on the assets of the company; and there are no scheduled repayments on principal and interest.

Equity financing is not without its shortcomings. First, you might have to relinquish complete or partial control of your company to investors if the company does not perform up to expectations. Second, equity is more expensive than debt because investors tend to require greater returns due to the increased level of risk versus debt lenders (e.g. risk in this instance is the uncertainty in rates of return from the different financing scenarios -debt holders receive interest payments while equity holders are relying on the market place to recognize capital appreciation). Finally, equity financing can be costly and difficult. The placement of equity in the form of common stock requires companies to meet many state and federal regulatory requirements as directed by the Securities and Exchange Commission. Also, the cost of auditors and lawyers to perform due diligence reviews and the cost of investment bankers for underwriting any stock issuance can cost hundreds of thousands of dollars.

The following options available for you to obtain equity financing: private investors (e.g. angels, accountants, attorneys, business associates, friends, and family); and venture capital firms. Let's examine the most popular forms of equity financing.

Equity Financing

Private Investors

Venture Capital

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