It could be pretty challenging to raise capital for your startup at the early stages of the business. Debt financing could be quite tough to acquire during the infancy stage of your business. So equity financing is quite popular and common, as far as, the early-stage entrepreneurs are concerned.
Equity is actually the ownership stake which both the investors and the business owner have in the startup or the company. Equity financing is all about raising capital for your business through investors. A business owner would be selling away a share of his company to the lenders or you could say that the investors are purchasing a share of your company in lieu of a certain percentage of proceeds.
This implies that the investors have faith in the company and they believe that your company has the necessary potential and caliber to make money. As such, they would be expecting a definite ROI. Some of the hot favorite equity financing options would include friends & family, venture capital, and angel investors.
Friends and Family
It is pretty common for businesspersons to request loans from their own family and friends before looking for other alternative equity financing choices. In exchange for the loan extended for financing a portion of your startup expenses, your friend or family member who has come forward to help you would be given equity in your company via stock offerings.
This type of equity financing is pretty attractive as family members and friends do not keep pushing you or expect repayment before your startup starts generating revenue. Along with the long-drawn-out time frame, this particular group of investors would not be typically participating in the everyday functioning of your business. Instead, you as the business owner would be having complete control over the way the company is being operated and how the investment would be utilized.
Angel investors would be providing a much more amount of financing as compared to family and friends, however, these angel investors would be requiring about 20 percent to 40 percent ownership stake in your business. This method of financing proves to be beneficial to an entrepreneur who is looking for something more than just money. These investors would be providing management skills and business expertise to your company for safeguarding their equity status.
An investment made by a venture capitalist is almost same as an angel investment wherein a business owner would be benefitting from greater funds along with business expertise and management skills of the venture capitalist. However, not too many startups are qualified to get venture capital because of the large scale of investment involved. This type of equity financing is best for businesses with really rapid growth potential like the firms belonging to the technology industry.
Mezzanine financing is supposed to be that hybrid form of equity financing that would be utilizing both equity and debt financing. The lender would be giving you a loan and your company would be repaying the loan under negotiated terms provided all works fine. Suppose your company fails, the lender would be having the right to consider converting the loan directly into an equity interest or ownership. Mezzanine financing would be protecting or safeguarding the lender from adverse conditions when your business fails just like a majority of small businesses do. Simultaneously, mezzanine financing would be allowing you as the business owner to keep the ownership intact, till the business is reaping profits.
Now that you know about the various forms of equity financing, it is up to your business requirements and your personal preferences as a business owner to choose the most appropriate form of equity financing for your particular business.
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