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Know your options - equity finance

Know your options - equity finance

 

Equity investment is a way to finance many different stages of the business journey.

Whether starting out, or experiencing a high-growth phase, equity finance forms an important part of finance arrangements for businesses and usually brings broader expertise with it.

Equity financing is the raising of capital through the sale of shares in a business. Equity can be sold to third-party investors with no existing stake in the business. Alternatively, equity financing can be raised solely from existing shareholders, through something called a “rights issue”.

Some investors take a minority stake, whilst others are interested only in a majority stake. Whichever is the case in a specific scenario, however, investors’ interests are aligned with the business, meaning all are on board for the growth journey.

Early stage equity finance

At an early stage, businesses will need long-term backing to fund the business through to revenue and profit. This could be through business angels and/or venture capital and is commonly in different rounds with different parties.

In the shorter term, equity investment can support an aggressive growth strategy

Blending different types of equity finance

A business may have many different types of equity finance. Founding shareholders will usually have put some initial equity into the business. Friends or family may also have ‘invested’ in the early stage of a business’s journey. Business angels may then take an equity stake. Venture capital (VC) investors, (also known as venture capitalists), corporate venture capitalists or private equity (PE) investors tend to be an option at the growth phase.

Financial institutions or the wider public may also invest in equity through a listing of the company’s shares. The public may also acquire equity stakes through equity crowdfunding platforms.

In reality, this is not simple – there are many equity finance options at each stage in your journey, especially when a business is doing well. Business angels, for instance, may invest at many stages in the business’s growth.

As it progresses, a company’s shareholder register will be a mix of investors who have taken stakes at different stages of its journey.

equity finance

What shareholders may expect in return

Unlike debt providers or lenders, (see know your options – debt), equity investors do not have rights to interest, or to have their capital repaid by a certain date.

Shareholders’ return is usually paid in dividends or realised through capital growth. Both are dependent on the business’s growth in profitability, and its ability to generate cash. Because of the risk to their returns, equity investors will expect a higher return than debt providers. Where a project requires longer-term investment than conventional debt offers, equity will be the most suitable form of finance.

There is also a hybrid of debt and equity finance – mezzanine. Mezzanine and growth capital loans are covered under growth finance.

Your finance journey

You can find out more about the advantages of different types of equity finance. The interactive journey tool within this website will show you what equity and debt options may be available to a business like yours. Or if you’d like to know more about a specific type of equity finance, then view your finance options.

Restart your journey Equity vs debt
Main advantages of equity finance
Other considerations - equity investment
Helping hand from HMRC
Equitable questions for an equitable outcome
The British Business Bank and equity

BUSINESS FINANCE GUIDE

Together on the journey

Access to the right kind of finance at every stage in your growth journey enables businesses like yours to invest, grow and create jobs. That’s why the British Business Bank and ICAEW’s Corporate Finance Faculty, and partner organisations representing finance and business, have created the business finance guide.

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