What is Equity Funding – How Company Sell Their Shares

Equity financing is a method of raising funds to meet liquidity needs of an organisation by selling a company’s stock in exchange for cash.

What you will learn-

1. Equity funding for startup
2. Various sources of equity Finance
3. Personal resources
4. Friend and relative
5. Government schemes
6. Initial public offering
7. Bonds issue
8. Angel investors
9. Venture capital funds
10. The legal aspect of equity funding
11. Equity like instrument
12. Conclusion
13. FAQs

• 

Equity funding for startup

Different businesses will of course have different financial needs which they fulfill by equity or debt funding

Financing need can be directly fulfilled to the nature of business for instance

And Financial needs of a production unit will be comparatively higher than that of a service providing unit .

Moreover ,Financing needs are likely to a company’s plan of scaling operations .

There are generally, two methods of Financing :-

1.Equity and debt equity represents owned capital that represent borrowed capital and there should be a balance between the two while bringing in equity from various sources

The most important thing that should be kept in mind is that equity leads to the dillusion of ownership and at the initial stage

• 

And, entrepreneurs will surely not want to share control of business with someone else

Hence in early stage of a business and equity funding should be structured carefully too much of third-party equity is not good for entrepreneurs.

• 

Likewise too much that is also not healthy for a business

Too much Debt in the initial years of a business will show the owners personal profitability.

Since ,majority of revenues goes away in paying death unlikely equity where the investor participant .

Only in profit there is a fixed amount of cost associated with that.

Which has to be taken care of their food by structuring the finals model of a business .

The entrepreneur should ensure that neither his diluting his ownership too much nor he is paying too much to his investors as interest.

Various sources of equity Finance

• 

The equity of startup ventures can be source either from formal sources or informal sources

While funding from formal sources represent private investment from Angel investor venture capitalist funds

Or, funding from public raised to a public offer funding from informal sources refer as borrowed funds .

The founders from their own saving or from their family members and friend

And each of these sources as a role to play at various stages during the lifetime of a Startup

Personal resources

The very first place where an entrepreneur gets initial funding

Are his personal resources which would include his savings real state investment in stock mutual fund etc .

Properties with equity value like real state cash value insurance policy investment in shares and security term deposit jewellery etc come very useful at initial stage for a Startup .

Things turn out to be easier where the other panel has real state properties in his possession.

One can easily get funding against real estate beside this other assets like jewellery or investment in securities.

Which can be easily liquidated to to realise cash also turn out to be useful resource of funding for the entrepreneur .

Friend and relative

• 

• 

Once the personal source get exhausted.

The next place to acquire funds from is approaching friends are relative

The funding from them maybe inform equity Finance in which the friend or relative would receive and ownership interest in the business.

In countries like India where it is very difficult to obtain funds from a new venture from formal sources like Bank financial institution

This is the most explored medium to fund raising

As it is easier to tap into one’s social network than to approach institution

However the investment received from them should be made with the same formalities as it would have been with third party investor so as to avoid complexities at later stage.

Government schemes

It is common to see government arrange for financial assistance in form of tax credit for startups to promote trade commerce and industry the startups action plan by government of India initiative to promote startups in India is one of flourishing example of the short.

10 team along with other incentives allowed by government of India

• 

Initial public offering

Initial public offering I’ve used effort to a stage where investment are invited for public at large by issuance of equity shares through share market .

• 

In countries like India it required several years of good record for a company to come out with an IPO of shares in the market

A company should be profitable for more than 2 years .

And of course, all these things are regulated by SEBI (security and exchange Board of India).

A public offer is where a company offers its shares to public

A large public offers can be of two types :-

1.Initial public offer

2.further public offer

Initial public offer refers to the first time when a company invite subscription from the public

And for the public offer referred to subsequent offers made by the company inviting

Subscription a public offer is subject to norms laid down in CA 2013 and its associated rules .

Additionally, a company coming out with and I also has to get approval from SEBI security and exchange Board of India at 1992.

Section 23 240 of CA 2013 deals with public offer of shares and securities

As, per the provision of section 26 a company should be existence for at least five years before coming out with an IPO .

Bonds issue

Basically, Bonds issue means issue of fully paid shares to shareholders without requiring them to pay anything

This is a more of capitalisation of profits where the shares are issued out of reserves of the company to the existing shareholders .

• 

When a company intends to issue bonus shares

This has to be recommended by the board of the company and subsequently

It has to get authorisation of the shareholders in the General Meeting of the company.

Where the company in question is a listed company it has to additionally comply with the provision of SEBI regulations 2009 and where the shareholders is a foreign entry the company additionally has to comply with the provision of FEMA (transfer of issue of securities by a person resident outside India) . Regulations 2009 .

• 

Angel investors

Angel investors are generally high networth individuals

Who are interested in investing in startups like we see who wait for a business to be up and running for making investment

The Angel investors are business at a comparatively early stage either when business is still an idea or where there is a a prototype of the product already there objective is more than just to focus on economic return however they still make similar demands as venture capitalists

Venture capital funds

Venture capital firm are points which primary make investment in privately held business they extend capital to newly incorporated ventures in exchange of an interest in business in form of shares these funds

Generally are given by venture capitalist so that a new startup can manage their expenditures a VCF generally is collective investment vehicle before making investment

It carries out a dilution of equity in which investing this is because they have a liability to its member and Unlike the informal sector of funding

VCF generally, expect a higher rate of return from the invested company this is mainly because through the startup .

Generally they,poses high risk yet they have very high growth potential they may look for annual return as high as 50% or even more considering the nature and risks associated with invested company

• 

The Legal aspect of equity funding

In India Rising capital in India is a complex process if the entity in question is a company.

The term equity like instrument refer to an instrument which two at the time of sharing is not equity but gets converted into equity after a specific period of time

This could also,include instrument like compulsory convertible preference share

• 

Equity like instrument

The role of equity-like an instrument in a Startup business has been discussed earlier therefore it becomes relevant.

Check equity for more

Primarily the manager of insurance of these instruments is largely in line with the matter of assuring of equity shares with some modification to it.

Conclusion

Basically,Equity financing is a method of raising funds to meet liquidity needs of an organisation by selling a company’s stock in exchange for cash.

FAQs