Equity investment

Equity investment is arguably the most complicated source of business funding to secure, but is also one of the most accessible in terms of the sorts of businesses that can obtain it. Investors provide cash into your business in return for a share of the business itself. The investor will expect to recoup their investment amount plus (a lot) more in the future from their share of the business profits or, more commonly, their share of the proceeds when the business is sold.

The details

Equity investment is often seen as complicated – the reality is that the basics are rather simple. It works like this:

• Let’s say that there are currently 100 shares in your business. You own 60 of these and your business partner Robert owns the other 40. Between the two of you, therefore, you own 100% of your business.
• An equity investor offers you £50k of funding in return for a 20% stake in your business.
• If you agree that this is a good deal for your business, you and Robert create an additional 25 shares in your business and allow the investor to purchase these for £50k.
• After this transaction has taken place there are now 125 shares in your company, 60 owned by you, 40 by your co-founder Robert and 25 owned by your investor. You and Robert therefore own 80% of the business whilst the investor owns the 20% they asked for.
• Most importantly, your business now has £50k sitting in its bank account to fund your plans.

In due course, the investor will be expecting to make back their £50k and a lot more from a combination of their 20% of your company's profits and their 20% of the proceeds when the company is sold. How much will an investor be looking for? Well, a 'multiple' of ten is often quoted – i.e., an investor will be looking to recoup ten times their original investment amount. This seems expensive compared to other sources of funding and finance, but remember that equity investor will often take risks far beyond those taken by other funders, for example by investing in start-up businesses with no proven revenues.

Equity investment is, of course, more complicated in real life than the above example implies, and it is wise to seek professional advice as part of any investment process.

Who provides equity investment?

Equity investors almost all fall into two categories: venture capital (VC) funds or angel investors. VC funds are the ‘corporate’ side of equity investment who invest a ‘fund’ of money raised from high net worth individuals, pension funds etc..  Business angels (often just known as Angels) are the other side of equity investment. They’re usually wealthy individuals who are looking for a home for some of their cash. Many angels look to bring more than just money to a business they invest in – they’re looking for an outlet for their experience. Business angels often operate in small groups known as 'syndicates’ or 'networks'.

Who is equity investment suitable for?

Equity investment is suitable for a wide variety of businesses at any stage. However, it's important to note that equity investors are almost always looking for businesses that will be built and then sold on, whether through a trade sale or an IPO (listing on the stock market), as it's this process that allows them to receive cash for their share in your business.

Advantages

• Equity investors will fund businesses most other sources of funding and finance won't touch
• Investors often bring more than just money to your business – it's in their interest that you succeed!
• There are usually no repayments associated with equity investment, so there's no impact on ongoing cash-flow or profits

Disadvantages

• You will forever give away part of your business in return for an equity investment
• Investors may wish to exert some form of control over your business (for example, having a seat on your Board of Directors)
• Obtaining equity investment can be time-consuming, with deals typically taking 6 months or more to arrange