Which type of equity finance is right for my business?

Alongside debt finance, equity investment is one of the most common ways a business can access finance to grow.

In simple terms, a business owner sells part of the business (via shares) to an investor in exchange for a capital investment.

Investors though can bring with them much more than just funding, with their business experience, profile, and networks particularly sought after amongst entrepreneurs eager to take the next step on the growth journey of their business.

Equity finance is often associated with more innovative businesses such as those involved in tech or the life sciences, but is often used to fuel growth in businesses operating in other sectors.

In this article we’ll outline the different types of equity finance that could be available as your business grows.

Like all finance types, it’s a good idea to seek independent advice to ensure a particular finance type works for you and your business.

Equity funding for growing businesses

Equity financing is a method whereby businesses garner funds to expand their operations by selling a portion of their business equity to investors in return for capital.

By acquiring a share of the business, investors become co-owners entitled to a proportionate share of the company's profits and assets.

In some situations, they may also be able to influence key company decisions.

Equity financing can be particularly beneficial for entrepreneurs or start-ups that lack the necessary assets or capital to secure other types of financing.

Below we’ve put together a list of the most common types of equity finance for early-stage businesses.

Angel Investment

An angel investor is an individual who uses their personal funds to financially support a small business, receiving a minority share of the business, typically between 10% and 25%, in return.

These investors are usually seasoned entrepreneurs or individuals with substantial business acumen.

The role of an angel investor extends beyond mere financial backing.

They also provide mentorship and assistance, contributing their expertise, network, and business insights.

This support can significantly enhance the growth and success of the businesses they invest in.

Angel investors are often deeply involved in the business operations, dedicating considerable time and effort to help the business towards its objectives.

As such, it's vital for both the investor and the entrepreneur to establish a robust relationship, given that they will likely collaborate closely for a minimum of five years.

The investment amount from an angel investor can typically range anywhere from £5,000 to £500,000 per business.

The exact figure is determined by the specific needs of the business and its prospective growth opportunities.

To learn more, visit our guide on Angel investment.

Venture Capital

Venture Capitalists (VCs) invest in young businesses with high growth potential, predominantly in sectors such as life sciences, IT, and FinTech, to support their expansion.

Their focus is on early-stage companies, which are typically pre-profit or pre-revenue.

In addition to financial investments, VCs also provide strategic advice through experienced board members.

These professionals guide entrepreneurs in fine-tuning their business strategies to successfully launch their products in the market, fulfil specific consumer or business demands, and ultimately generate substantial value.

Venture Capital funds usually operate in investment cycles ranging between five and seven years.

During this period, they anticipate substantial growth in the businesses they invest in, which in turn, provides a return on their investment.

Occasionally, funds may retain an investment to further stimulate the growth of the business.

Read our guide to learn more about Venture capital.

Equity Crowdfunding

Equity crowdfunding is a form of finance that enables a business to secure funding from a number of investors in a manner that follows regulatory standards.

This process involves listing your business on a digital platform designed to facilitate the purchase of shares by investors and the general public.

Prior to listing, an equity crowdfunding platform will thoroughly evaluate a business and the supplementary documents provided by its owners to ensure they meet its rules.

Certain platforms may also offer guidance in determining the investment amount or duration for which the business owners are seeking funds.

It's important to note that each crowdfunding platform has its own unique features.

Some may handle shareholder communications on behalf of the business, whilst others may provide business advice.

Before committing to a particular platform, it's crucial to engage in a detailed discussion regarding its services and areas of expertise.

To learn more, read our guide on Equity Crowdfunding.

Mezzanine Finance

Mezzanine financing is a hybrid form of equity finance, combining elements of both equity and debt financing.

The term 'mezzanine' originates from the Latin word 'mezza', signifying 'middle'.

Despite being more intricate than other finance forms, it offers lenders a means to facilitate company growth and profitability, providing a safety net if things don't proceed as planned.

Initially the form of finance is a loan but, in scenarios where the business fails to repay, the lender may acquire an ownership stake in the company as compensation.

However, this typically occurs after all other lenders and investors have been reimbursed.

Mezzanine financing could be considered by businesses when the associated risk of non-payment is high enough to prevent securing a conventional business loan, or when the total funds required are so substantial that a single lender hesitates to provide the entire amount.

To learn more, read our guide on Mezzanine finance.

Equity funding for mature businesses

Whilst equity finance is often used to support early-stage companies, there are also advantages for more mature businesses to go down the equity finance route if they’re looking to secure capital to grow.

We’ve highlighted some of the most common ways mature businesses access equity finance below:

Private Equity

Private equity is a financing method where a private equity (PE) firm provides capital to a business, acquiring an equity or ownership stake in return.

This investment is typically a majority one, meaning the investor purchases a controlling interest of over 50%, though minority investments by PE firms are also possible.

When the circumstances align, private equity can be mutually beneficial for both the PE firm and the business.

Businesses can secure the necessary investment and expertise to accelerate a growth phase, while PE investors stand to gain substantial returns upon their investment exit.

When compared to venture capital, private equity is generally better suited to mature businesses and often supports management buyouts, instead of focusing on younger businesses or startups.

The hallmark of private equity investments lies in the close collaboration between the PE firm and the existing management team, aiming to achieve a well-defined common objective—whether that's rapid growth, increased efficiencies, or another goal.

Nonetheless, private equity isn't the right choice for every business.

With the availability of more alternative investment forms, many companies are exploring funding options that offer them greater control.

Learn more about Private Equity with our guide.

Initial Public Offering

An Initial Public Offering (IPO) represents the first instance when a company seeks public funding.

Before this stage, the business is typically reliant on private investment.

The process of going public offers companies the opportunity to raise substantial capital from new investors.

Since there are numerous investors, each owning a small equity stake, and no majority stakeholders, it allows the business to maintain control.

Commonly known as 'listing' or 'floating', an IPO marks a company's entry into the public market.

In the UK, these public markets are part of the London Stock Exchange.

Often termed as 'long-term capital' or 'patient capital', this method can be used repeatedly by businesses to raise funds over extended periods, spanning years or even decades.

Once a company goes public, there are certain requirements it must meet.

For example, it is obligated to provide regular financial disclosures and keep shareholders and the market updated with half-yearly and annual results.

There are three main markets for IPOs in the UK.

• Main Market – this market is for larger businesses and is home to the FTSE 100 and 250
• High Growth Segment – this market is designed for mid-sized businesses.
• AIM – this market specialises in smaller businesses looking to scale up.

To learn more, visit our guide on IPOs.

What are equity funding rounds?

The equity financing process comprises various stages, each corresponding to different levels of business growth.

These stages are referred to as funding rounds and each round plays a crucial role as the raised capital is typically used to propel the company into its next growth phase.

Each funding round can be viewed as a stepping stone that aids a business in its progression from a nascent idea to a fully operational enterprise.

Read our guide to equity funding stages.