ENT-650: Financing in another Form

In a previous post I discussed debt financing. Now I want to take a look at equity financing. Equity capital is money provided in exchange for ownership in the company (Rogers, 2020). The equity investor will receive a percentage of ownership and it is possible that they will receive a portion of the company’s profits as well. Dynamics such as these are why entrepreneurs should understand the pros and cons of this form of capital before trying it. For consideration, a few pros of equity capital are that no collateral is required, there can be values-added investors, and companies typically grow faster as a result of it. Contrastingly, equity capital can be very expensive, the entrepreneur will have new partners and the entrepreneur could even be replaced (Rogers, 2020).

There are common sources shared between equity and debt capital. These sources include personal savings, friends and family, and angel investors. There are, however, a few outliers. Whether its deft or equity financing being sought after, both are categorized as private placement financing. In essence, capital is not being raised on the open market via an initial public offering (Rogers, 2020). This holds true for individual sources of equity financing, but there is an industry full of “institutional” investors. These are firms whose business is to provide equity capital to entrepreneurs, with the expectancy of high returns. Sometimes both individual and institutional funding is used.

Jeff Bezos is an entrepreneur who used almost all sources of capital available to raise money (Rogers, 2020). This reflects an important ideal. Over time a business and there needs tend to evolve. As such, during the transition of a business from an idea to an established company the type of financing required will likely change. This is why it is imperative for entrepreneurs to make sure all bases are covered. This ensures that the proper channels are in place so that there is easy access to the necessary resources when needed.

References:

Rogers, S. (2020). Entrepreneurial finance: Finance and business strategies for the serious entrepreneur (Third ed.). United States: Mcgraw-Hill Education.