Sources Of Equity Capital For Your Business

Equity capital refers to the funds raised by a business in exchange of ownership shares in the company. Ownership, in turn, is represented by possession of stock shares either outright or the right of converting other financial instruments into the private company's stock. Two primary sources of equity capital for the new businesses are institutional investors and venture capitalists.

Institutional Investors refers to the group of financial organizations (such as investment companies, endowment funds, depository institutions, insurance companies, and pension funds) or high net worth individuals who invest in companies and businesses and fund their start-ups. Venture capital is meant to provide businesses a financial cushion. Equity providers are the last to take a call on a company's assets. Considering the low priority given to them and in the absence of current pay requirement, equity providers offer capital on high rate of returns.

Equity Funding Mode:

Majority of businesses prefer the equity funding mode. Such funding is provided the venture capitalists or institutional risk takers who could be large financial institutions or high net worth individuals. Such investors constantly look out for start-up businesses where they can invest their money. They prefer to invest in at least three to five year old companies that posses the potential of becoming large national players in the long run. Such venture capitalists check several potential investment options annually but may choose to invest only in few of them.

The venture capitalists may choose to participate in the management strategies of the company, in which they invested. They generally play a passive role in that company's management, however, are free to react if they do not find certain things in the management worthy from the investment perspective.

Generally, the venture capitalists do not prefer funding start-ups and financing companies in their early stages, as the level of risk associated with such companies is often high. However, there are exceptional cases, wherein, the entrepreneur has obtained such a funding pattern, if he has a proven track record in the business where he operates.

Securities Offerings:

Producing genuine securities offering before the investors, while seeking for their investments is must. Otherwise, your company may end up violating the Federal and State Securities Laws, which could have disastrous consequences.

Research the market well for the right contacts of private capital before structuring any deal. Check out the contract options available in the market carefully. The most popular options are – royalty financing contracts, preferred stock, and short-term mortgage loan that has a tenor of three to four years.

It is advisable to enter into a contract with a trusted entity for fulfilling the securities offering procedure for the company, for the firm's safety. Such a contract ensures that you, as an issuer, are not liable for any violation of regulatory compliance.