It is a rare company indeed that is able to start a business and grow it to a profitable enterprise solely on the basis of cash generated from operations. The vast majority of companies require some form of outside financing. That leaves two alternatives: (i) the company can borrow the required capital (usually from banks, finance companies or asset-based lenders) or (ii) they can sell stock or other securities to raise the necessary funds. This latter approach is generally referred to as equity financing.
Equity financing takes a variety of forms. Early on, equity financing most often involves the issuance of stock to founders in exchange for cash, assets or services (so-called “sweat equity”) and raising investment capital from friends and family, who more often invest based on who the founders are rather than thorough due diligence of the company and its business plan. As the company continues to grow, equity financing is often provided by more professional investors, including angel investors, venture capital and private equity funds and sometimes strategic partners of the company seeking the capital, such as key customers and suppliers.
If you are starting a new company or already own a privately held company, PLDO partner and business attorney Bill Miller offers important considerations to keep in mind regarding a planned or future equity financing in his latest business advisory, Equity Financing for Privately Held Companies – Some Do’s And Don’ts.