Equity finance is a way of financing your business without having to give personal guarantees or security in your business. But you do have to surrender a certain percentage. Is it worth it? Here's what you need to consider before opting for equity finance.
1. What sort of equity finance do you want?
There are a number of different types of equity finance, ranging from investment by a friend or relative, to venture capital or even a share placing through the stock markets. The type you choose will depend entirely on your circumstances and on the level of investment you require.
However, whatever you go for, err on the side of caution. Accepting investment from a friend may seem less daunting than dealing with stock markets but can be equally hard if things go wrong. You could lose a great friend as well as your business.
2. Is equity finance right for your business?
If you want to maintain control of your business, equity finance isn't for you. Remember that the larger the investment, the more control you can expect to give up. So, determine whether you want to combine equity finance with another method of raising capital; this way you might be able to retain a greater percentage of your business.
3. What does equity investment involve?
Equity investment is different from a bank loan: you will not be charged interest as such on any committed funds, but the type of shares that your investor takes can require significant cash payments, depending on the structure of the investment. So make sure you take the best advice from advisers you trust. Sometimes, so-called equity investments can feel like the worst loan possible.
Once involved, investors may contribute their skills, knowledge and contacts to your business; they may also be willing to provide further funding to generate growth, but they will expect you to listen to – and act on – their advice. You must be prepared to give up some management control in your business.
4. What investors look for
The best investors will probably understand how your business works, so fully research your investor to see whether your business lies in their area of interest/expertise.
Equity investors take a risk on businesses that may fail, so you need to reassure them that your business will succeed. Prepare a convincing pitch, write a solid business plan and convince them that there's a market for your business and that you can sell into it. Nothing speaks louder than a sound track record.
You'll also need to show investors that their opinions will be taken into account and that they will have a certain amount of control. Make sure you behave in a way that demonstrates that you understand this point.
Finally, be realistic: if you don't want to lose 50 per cent of the business, don't do the deal.
5. Key steps
If you decide that equity finance really is right for your business, you should:
* Determine how much money you need, then work out whether you're willing to lose a piece of the business to secure it.
* Make sure the plans you have for your business are realistic.
* Ensure your business is ready for external investment; you should have the right information, the right opportunities and the right people.
* Take the best advice you can find – and that doesn’t mean the most expensive. Ask around to get someone whom you trust
And remember, taking an equity investor is like a marriage; it might be for the life of your business, so choose well and it will be the best thing you ever did. Choose badly...
Jo Clarkson is the operations director of The Alternative Board.