What is equity finance?

easy moneyEquity finance is investment in your business in return for a share of the business and a share of the profits. Equity can come from the owners of the business, or outside individuals, companies or investment bodies. It includes business angels, other informal investors and venture capital.

Equity is a form of finance which is generally used to catalyse growth, either at the start of a business or to fund expansion, an acquisition or a management buy-out. Much media attention focuses on high return venture capitalists, but other types of equity investors can provide more patient capital with some element of risk sharing and may not require the kinds of control needed by purer forms of venture capital.

An equity investor becomes a partner in your business. Your business’s success is also their success, so they will generally do what they can to help it to get there. For them it’s a risky investment where success is by no means guaranteed. As a result, formal investors will be looking for a good return on their investment and for you to have an ‘exit strategy’ so that they can access that return reasonably quickly, through sale or floatation on the stock market.

Friends and family

There’s thought to be a huge amount of informal investment provided by family, friends, work colleagues or others. This kind of support is often below the radar and not picked up by formal statistics, although informal investors could and should take advantage of the generous tax breaks available. This finance may be more or less structured like a loan or an equity investment and be related to a share in profits, often with delayed payments.

Business angels

Angel investors are generally well-off people who provide small investments for start-up or growing businesses. In return they usually receive equity – a percentage of the ownership of the business. There are generous tax breaks to encourage business growth with this kind of investment through the Government’s Enterprise Investment Scheme. A study by NESTA in 2009 found that the average investment was £42,000 and the average equity stake was 8%. There’s no ‘set amount’ for angel investment which can be as small as £5,000 and go up to several £million. The tax break for investors was doubled to £1 million in 2011. Business Angel investors will be looking for a good return on their investment and they are generally looking for an exit, or sale of their shares, within 5 years.

Most business angel relationships are sourced by the business seeking investment through their own networks. There are also several Business Angel Networks that help to match-make businesses with potential investors. Those networks also enable angel investors to share research efforts and pool capital.

Venture capital

Venture capital (VC) is generally aimed at early stage companies with high-growth potential. Investable companies need to have a novel or disruptive idea or business model which has the potential to become highly profitable. VC investment is high-risk, most investments fail. As a result VC funders are quite hands-on, taking a significant role in decision-making as well as their portion of ownership and value. The level of risk means they also need and demand high rates of return. As a result VC is only really suitable for sectors and business models with high growth potential. Investors will also want to see a high quality management team. Less than 1% of UK businesses use this form of finance. Funds typically invest from £250,000 up to several £ million.  Creative Industries fund MeWe360 / Ingeneous is looking to invest between £30,000 – £150,000.

Contacts

UK Business Angels Association  UK Business Angels Association is the national trade association dedicated to promoting angel investing and supporting early stage investment in the UK.

British Venture Capital Association  The BVCA is the leading industry body and public policy advocate for the private equity and venture capital industry in the UK.

 

Erika Watson

Erika Watson

Hi, I am the founder and editor of Prowess, so the person to get in touch with if you have any ideas, queries or feedback: erika [a] prowess.org.uk. I run my own business too: Greenwell Consulting a communications company focusing on Enterprise, Environment & Equality. See here for details of our Start-up and Business Development workshops.
Erika Watson

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