Why an Owner Would Consider Giving Up Control of Their Company in Exchange for Financing.
Why would an owner consider giving up control in their company in exchange for financing?
With equity financing, an owner exchanges equity in their business—usually in the form of shares—for capital. Equity financing isn’t a loan and doesn’t need to be repaid. Without debt to repay, an owner can invest the funds into their business where the capital is most needed. Investors are betting on future company prosperity (or acquisition) to repay their outlay through dividends or higher share prices. By owning equity, the investors will also have some decision-making control.
Equity financing is a good way to raise capital for a company with a variety of needs. For example, equity financing is ideal for a new business that doesn’t qualify for conventional loans or for a business owner considering an ownership change in the future. Another advantage of equity financing is that a company with a low credit score or poor credit history can obtain funding without needing to take on riskier, high-interest loans. A business with low debt levels is perceived as a safer investment for equity buyers as the company is more likely to thrive.
A business owner can utilize angel investors, venture capital firms, crowdfunding platforms, corporate investors or public stock offerings to raise equity capital. Some investors may also provide management expertise, access to their business networks or help an owner find additional financing or buy equity more than once. Equity investors are motivated by safeguarding and expanding their investments or ensuring a new business doesn’t fail.
Corporate Finance Institute: Equity Financing: https://corporatefinanceinstitute.com/resources/knowledge/finance/equity-financing/
Investopedia: Equity Financing: https://www.investopedia.com/terms/e/equityfinancing.asp