Equity financing is a method of raising funds for a business by selling ownership shares to investors. In exchange for their investment, investors become partial owners of the business and are entitled to a portion of its losses or profits through dividends or capital gains if the company's value increases over time.
Equity financing is commonly used by startups and growing companies that do not have the resources to obtain traditional bank loans or other forms of debt financing. One advantage of equity financing is that it does not require the business to make regular interest payments or repay the principal amount of the investment. It can also be an attractive option for investors who are looking for higher potential returns, as they have the potential to benefit from the company’s growth and success. However, it also means that the original owners of the business will have to share decision-making power and control over the company with the new investors.
There are several types of equity financing, including angel investors, venture capital, and through initial public offering (IPO). Angel investors are typically wealthy individuals who invest in early-stage startups in exchange for equity. Venture capital firms are professional investors who provide larger amounts of funding in exchange for equity and a say in how the company is run. Public offerings allow companies to sell shares of stock to the general public on a stock exchange.