Different Types of Equity Investment

Are you a small business owner trying to take that next step and level up your business? This can often be the hardest part, as the gap between where you are and where you want to be can feel enormous.

The good news is you don’t have to go it alone, and the right kind of investment can give you just the boost you’re looking for, supercharging your business and speeding up growth.

But what are the different types of equity investment available? And which one is right for you?

Let’s dive in, starting with how equity investing even works to begin with.

What is equity funding?

This type of investment involves someone putting in capital in exchange for a share of ownership in the business.

While the capital is typically cash, it could also be some kind of business asset which holds equal value.

The investor gets a share of the business (the equity) in exchange, which can be wonderful if it increases in value (and not so great if it doesn’t).

How do businesses use equity investment to grow?

An up-and-coming business can use equity funding to support its continued growth. For example, by:

You’ll typically want to have an idea of how you’ll use the investment prior to going in to pitch for it, as investors obviously want a return, and so they need to see you at least have some kind of plan.

Who uses it?

Equity funding is particularly common amongst startups and businesses which are in the process of expanding (or which at least have the potential for growth).

The reason for this is because investors want to see a return on their investment, and so they want to put their money somewhere they’re likely to get it back and more.

What to consider about equity investment

This type of investment doesn’t require repayment (as with a loan), but you do have to be willing to give up a portion of your business and share control – so there are pros and cons.

Some businesses will ask for a buy-back agreement; the exact nature of these varies but it usually means the original owners have the option to buy back the investor’s shares after a certain amount of time passes.

Different types of equity investment

Now, where can you get equity funding? The term equity investor covers anyone who swaps capital for a share of a company, but there are specific sources, including: angel investors, venture capitalists, or crowdfunding platforms.

Angel investor

An angel investor is usually someone with a high net worth and considerable resources to help you grow your business, and they take an equity stake in return for their financial backing.

They’re a more specific type of equity investor because they’re usually private individuals and tend to be quite involved in the day-to-day operations of a business. This mentorship can actually prove to be one of the most valuable aspects of your partnership with them.

You essentially have a direct line to someone who’s been there and done it, which is great if you’re a startup who’s eager to learn.

The main benefit to partnering with an angel investor is they’re able to act fast and make decisions quickly – unlike banks, for example, who have to get every little thing approved.

Venture capital

Unlike an angel investor who invests their own money in startup ventures, a venture capitalist invests money on behalf of a risk capital company, specialising in finding funding for unproven or “high risk” businesses (typically startups).

Venture capitalists often offer support and guidance too, helping entrepreneurs refinine their business strategies with the aim of creating tangible value by filling a gap in the market or meeting specific consumer needs.

As with angel investment, a venture capitalist expects to make a return on the funding they put in, and so it’s in their interest to set you up for success – as this will directly benefit them down the line.

It’s worth noting that venture capitalists often invest in cycles of between five and seven years, so it’s not just a short-term arrangement!

Crowdfunding

Another good source of investment, crowdfunding allows businesses to raise funds from a large pool of people, typically in exchange for equity, rewards, or simply because they want to support you and help realise your project.

Different types of crowdfunding

Campaigns can be organised through online platforms like GoFundMe, Kickstarter, and Indiegogo, which give you a means by which to share your idea with the world in the hope of receiving donations.

Alternatively, Seedrs is an online equity crowdfunding company that provides access to startup investing, so rather than a donation there’s more of an exchange taking place.

This gives investors a place to buy and sell shares in private companies, helping entrepreneurs raise the necessary capital for their companies while also building a community of like-minded people in the process.

Another option is peer-to-peer lending, which matches businesses directly with individual lenders willing to loan them money (usually at reduced interest rates).

The main benefit of this is more flexibility, and it also gives you the chance to engage with people who are excited about what you’re trying to achieve. In other words, they see the vision.

Is an investor the right choice for me?

Everyone’s different and likes to do things their own way, so maybe you’re not sure working with an investor would be right for your business.

There are other options you may want to consider, like more traditional loans or applying for business grants.

If you’re really stuck, an accountant can help you figure out how best to go about securing funding for your business, based on your unique circumstances and general preferences.

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.