Simply put, equity finance is money that is raised by issuing shares of the company. The basic aim to generate capital by using company equity. Equity finance comes in various forms and is principally provided by venture capitalists and business angels.
On Equity Finance
The process may be defined as a method that is used in order to generate share capital resources from external investors, with the share capital being provided in lieu of company shares. Equity finance is normally invested with the assumption that medium to long term profits may be made.
Investors of Equity Finance
The investors are normally different from conventional money lenders, in that they normally have no right to any form of interest payment, and cannot expect to be paid within a specified time. The payments made to investors, normally done through dividends, depend on the performance of the business.
Forms of Equity Finance
There are a number of forms of equity finance, and, on certain occasions, one comes in the shape of sharing in the expected profits. However, the most common, is a certain amount of ownership in the shares of a company.
Providers of Equity Finance
There are two entities that are primarily responsible for provision, namely the venture capitalists and the business angels. Venture capitalists provide equity finance for privately held companies, and are, in essence, private equity companies.
Equity Finance Risks
There is a lot of risk involved; this can be said based on the fact that the payment of the investors is highly dependent on the success of the company. Having no growth or profit would result in an adverse effect on the payment possibilities of investors. This is the reason why equity finance is also referred to as risk capital.
