Glossary - Equity Financing
Equity financing refers to the process of raising capital through the sale of shares in a company. This type of financing allows companies to obtain funds without incurring debt by offering a portion of ownership in the company to investors. In return, investors receive equity shares, representing a claim on the company's earnings and assets. Equity financing is commonly used by startups and growing companies looking to expand operations, develop new products, or enter new markets without the burden of debt repayment.
Also known as
- Share Financing
- Stock Financing
Use cases examples
- Term Sheet: The term sheet outlines the equity financing agreement, including the number of shares to be issued, the price per share, and the valuation of the company pre- and post-financing.
- Shareholders' Agreement: The shareholders' agreement specifies the rights and obligations of the shareholders acquired through equity financing, including voting rights, dividend policies, and provisions for the transfer of shares.
Considerations for investors
- Return on investment - Investors should evaluate the potential for significant return on investment, considering the risk associated with equity in startups or growth companies.
- Exit strategy - It's essential to consider the exit options for recovering the investment, including IPOs, acquisitions, or share buybacks.
Considerations for founders
- Dilution of ownership - Founders should consider how much of their company's equity they are willing to offer, as raising capital through equity financing will dilute their ownership stake.
- Control and decision-making - Founders must be mindful of how new equity shareholders might affect the company's decision-making processes and control.
- Valuation - Properly valuing the company is crucial to avoid giving away too much equity for too little capital.
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