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Equity finance: frequently asked questions

What is the definition of equity finance?

Basically, equity finance is a method of financing for a company. That company will issue shares of its stock and in return for these shares, it will receive money.

What percentage of a business can be relinquished to raise equity?

This can vary a great deal; anything from 25% to 75% of a business can be relinquished.

How does venture capital work?

This is a fairly widespread method of equity finance. Venture capital is often used to finance businesses operating in fields considering to have reasonably high risk (but which therefore provide a high return).

The amount of equity finance in a venture capitalist’s hands becomes a key factor of the company’s stage of development when the investment is made (along with other factors such as the amount invested, and the business relationship between the entrepreneur and the venture capitalist).

What businesses are affected by venture capitalist equity finance?

A venture capitalist will consider investing in any kind of business. Some prefer to invest in businesses they are more familiar with. This type of equity financier is known as an ‘angel’. Although angels won’t play an active role in the day-to-day management of a business, they will certainly wish to participate in the overall strategic planning.

The reason for wishing to be more hands on ‘behind the scenes’ is that the angel will need to have their finger on the pulse of key business areas, thus reducing risks (and maximising the profit margin).

Are some industries more attractive to equity finance than others?

Yes. Although venture capitalists will be open to business opportunities, many are drawn to industries that rely on modern technology. High up on that list of desirability for many equity financiers are companies involved in IT and communications, electronics, genetic engineering, and most fields connected to medicine and health.

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