What Is Equity Financing?

Equity financing is a fundraising method that involves profitable organizations selling shares of their company.

Written by Matthew Urwin
Published on Dec. 16, 2021
What Is Equity Financing?
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Kristen Pascoe | Aug 11, 2022

Businesses may have an urgent need for cash, or they may need extra funds for long-term growth. Regardless of the circumstances, equity financing leads to immediate cash that an organization can apply to its financial goals. This method helps a company gain some traction, and it can also serve as an employee incentive in the form of stock options.

What are the types of equity financing?

  • There’s no one-size-fits-all approach to equity financing, so companies need to select the method that works best for them.

Startups and businesses have plenty of options at their disposal when seeking more funds. Venture capital and equity crowdfunding are two similar paths that display unique characteristics. While the former pursues funds from individuals and their networks, the latter relies on thousands of investors who can become loyal customers of a company. 

Growing organizations can customize their experience further with other equity financing options. If founders want to find financial sources outside of their immediate family and friends, they can receive a boost from the wealth of angel investors or the networks of accelerators. Once company leaders determine the size of their investor group and how much control they want to retain, they can select an equity financing route that suits their preferences.

What is the difference between debt and equity?

  • Debt and equity investments offer companies varying degrees of financial freedom and control.

As common investment strategies, debt and equity can help companies achieve financial stability during crucial periods of growth. However, the two methods result in very different relationships between companies and their investors. Debt often takes the form of loans, which companies need to pay back. Once these loans are repaid, a business no longer has a relationship with the investor. 

Meanwhile, equity leads to investors gaining a share in the company, making it essential for founders to cultivate healthy long-term relationships with their investors. Businesses no longer have to pay back investors during equity financing, but they will have to share control over the company’s profits and decision-making processes.

When should equity financing be used?

  • Equity financing serves as an excellent solution for companies in need of immediate funds, especially startups.

Startup companies have reaped great rewards from this method because they often need to gather cash in a short amount of time. As a result, equity financing is a great way to guide a business through its initial stages of development.

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