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Equity capital: The best way to fund your business or a financial risk?

by , 05 December 2014
Equity capital is when an outside investor puts money into your business. In return, he gets a share of the company's ownership.

This is what you'll see if you watch Dragons' Den when potential business owners ask for X amount of money in exchange for X percent of the candidate's business.

Although there's less risk with equity capital, you give up full control of your business. If you give the investor 50% or more, he gets the controlling share of your business.

While you can control how much of your company you hand over, you have to carefully consider the agreement. After all, we've all heard horror stories of shareholders ousting business owners by slowly buying more and more shares.

The truth is, equity capital can be very bad in such a situation. But you can avoid this and make it a very good thing for your company. All you have to do is choose the right investor and ask them the right questions.

Read on to find out how to do this so you can make your next equity capital agreement a successful one...

 
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Consider these four types in capital investors when you look for an investor to fund your company

 
There are numerous types of investors who will invest in equity. Because of this, you should consider which of these best suits your business:
 
1. Angel investors: These are healthy private individuals who invest in your business. These are difficult to find. 
 
2. Venture capital: Companies that give capital to small, high potential companies. It makes money by owning equity in the companies it invests in. It then sells its shares in your business later on to make money.
 
3. Private equity: Funds that invest in mature companies. Private equity companies sell their shares in your business later on to make money. They do this by telling the company to register on a stock exchange
 
4. Listing capital: Selling a portion of your company on a recognised stock exchange. In SA, the most recognised exchange is the Johannesburg Stock Exchange (JSE). 
 
If you have a smaller company, it's difficult to sell shares directly on the JSE. The AltX is an alternative public equity exchange you can consider.
 
Once you choose a way to get your equity capital, discuss the terms of the agreement with your investor. 
 
When you do this, remember to discuss these six issues.
 
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Without them, your business can't continue to run. Management won't be able to make informed decisions regarding the future of the business if details about the company's past aren't available.
You must back up your records and make sure they're kept securely. Chapter A01 of the Practical Accountancy Loose Leaf will show you:
 
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Discuss these six issues with your investor before you sign an equity capital agreement

 
Since equity investors take a part of your business, you must discuss issues relating to partnership. That's why you must discuss:
 
1. The time horizon for investment and how the various partners must exit;
2. How you'll make decisions;
3. How you'll source future capital for your business;
4. Whether there are additional services the investor will offer your business;
5. What protection is in place for the minority shareholder; and
6. How long the equity partner expects you to be 'locked-in', on an employment basis.
 
If you choose the right kind of equity capital investor for your company and discuss the relevant issues, equity capital could the best way to fund your company.  
 


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