Equity Financing

Equity represents the ownership of your business, so equity financing means that you sell part of your ownership interest in exchange of capital. Equity is usually sold in the forms of stocks or partnership agreement.

By selling ownership or equity of your business, you also sacrifice some of your management right. Since your investors are also owners of your business, you have a responsibility to act in their best interests, not only yours.

Usually, equity financing can be obtained from the following sources:

• Founders. Most small businesses are initially funded by the founder's personal savings and other assets.
• Friends and family. They can provide you either debt financing or equity financing.
• Angel investors. Angel investors are usually individuals that invest in star up companies with high growth possibilities. These are often entrepreneurs who have extensive experience in your industry and are willing to serve as mentors or board members of your business.
• Venture capital. Venture capital comes from either private firms or public organizations (Small Business Investment Companies, or SBIC). These investors look for fast growing businesses that will give them high rate of return.
• Strategic partners. The strategic partner investor are usually in a business or industry that's related to yours. It became popular in 1990s in technology industry.
• Private placement. A private placement is a private sale of stocks to small number of accredited investors. According to SEC (security exchange commission), accredited investors are:
  • individuals earning 200k+ per year
  • households with income of $300k per year or having a net worth over 1 million.
  • or venture funds, some banks and other institutions.
• Public offering. This is an excellent financing tool for development stage companies. We all remember the IPO boom for dot com companies in late 1990s.