Equity finance
How should I identify the right equity investor for my business, what value can they bring over and above finance, how long does it take and how much does it cost?
Equity finance involves selling a part of your business (shares) to an investor, who then becomes a shareholder and receives a cut of the profits, as well as their share of sale proceeds in the event of an “exit” (sale) of the business. Equity investment means you won’t have to pay interest or repay debt, although private equity will typically require a preference share that does repay interest at exit. Only limited companies can raise finance by selling shares, meaning sole traders and partnerships cannot seek this form of finance – so if you’re one of them, skip this section.
There are different types of investors, the main types being: friends and family, angel investors (typically wealthy individuals or families), venture capital and private equity. The main difference between which one you should have relates to the life stage of your business. Many startups receive initial funding via angel investment, crowdfunding, or bootstrapping (see our guide to bootstrapping here) via friends and families. Venture capital firms would typically invest after this stage, unless they were specifically targeting pre-revenue firms and sectors. This often happens a series of rounds (e.g. A, B, C), while private equity invests in more established businesses with proven cash flows and profitability. Businesses seek private equity or venture capital investment for a number of reasons: product investment, sales and marketing, accessing new distribution channels, operations improvement, international expansion, hiring of new staff, and so on. Investors typically provide more than just finance to businesses, as their experience and networks will help complement, guide and mentor executives at different stages of the firm’s growth.
Businesses seek private equity or venture capital investment for a number of reasons: product investment, sales and marketing, accessing new distribution channels, operations improvement, international expansion, hiring of new staff, and so on.
Investors typically provide more than just finance to businesses, as their experience and networks will help complement, guide and mentor executives at different stages of the firm’s growth.
The key thing to remember is equity investment comes at a price. It can be expensive, time consuming and may involve you losing control of your business in terms of all the major decisions, including selling up. Find out if it’s right for you using the resources below.
Equity investment
Balance the pros and cons of equity investment
from NI Business
WHAT? A short but comprehensive article on the pros and cons of an equity investor
WHEN? You’re considering approaching an equity investor
WHY? You want to be sure you’ve covered off all the risks and advantages of equity investment
OTHER RESOURCES?
>> A short summary on equity investor pros and cons from The Hartford
Business Angels
Understand who business angels are, and what they do
from London Growth Hub
WHAT? An insightful overview of how to approach business angels
WHEN? You’re looking to approach an angel investor and need a thorough overview of what to expect
WHY? Helps you efficiently manage your time and effort with investors and ensures you match their needs
OTHER RESOURCES?
>> Angel investors versus venture capital from Virgin Start Up
Angel investors
Peruse a database of 'business angel' equity investors
from the UK Business Angels Association
WHAT? A wealth of information on getting investment from a business angel - this page includes a link to an up-to-date database and search tool for potential investors (you'll need to become a subscriber, which is free, to access the database)
WHEN? You’ve decided on equity finance and want a long-list of potential investors by sector, investor type and investment level
WHY? Rather than searching for them yourself, this ready-made list can help you efficiently target investors
OTHER RESOURCES?
>> A PDF guide on what to include in your business plan for equity investors, from UKBAA
Enterprise Investment Scheme
Find out what the Enterprise Investment Scheme (EIS) is
from Syndicate Room
WHAT? A full overview of EIS with worked examples. A UK government initiative, The Enterprise Investment Scheme assists younger, higher-risk businesses in raising finance by offering interested investors generous tax reliefs.
WHEN? You want to know if EIS can help you, and to apply for it if it does
WHY? Knowing about this type of investment – and how you can use it to your advantage – will broaden your options
OTHER RESOURCES?
>> See advice on how to apply for EIS from GOV.UK
>> Look at our advice on Crowdfunding
Private equity and venture capital
Learn about private equity and venture capital from the perspective of the trade body
from the British Private Equity & Venture Capital Association
WHAT? An insider’s guide from the private equity and venture capital industry trade body
WHEN? You’re actively considering private equity or venture capital and need to know the whole process
WHY? To ensure you appreciate the considerable effort required to secure funding through these routes
OTHER RESOURCES?
>> Private equity summary guide from Growth Business
>> Weigh up private equity’s pros and cons from Money Soldiers
>> Demystify private equity (a long but extremely comprehensive read) from accountancy body BDO
Private equity deals
Use these deal and model templates
from the British Private Equity & Venture Capital Association
WHAT? Templates for a venture capital or private equity deal
WHEN? You’re approaching a private equity deal and need to know the industry norms for legal documents
WHY? To better equip you with the types of legal document you’ll see and help ensure your terms are fair and reasonable. However, these templates are not a substitute for specialist legal and commercial advice.
