How to get shareholders

If you are a business owner looking to raise cash for your business you may be considering taking on shareholders. Selling shares in your company is one definitive way of raising long-term finance for your business. This process is also known as equity finance. The advantage of equity finance is that you do not have to repay the finance or pay interest on it as you would with an overdraft, bank loan or line of credit.

Having shares in a company represent ownership. The basic premise of shareholding is that when an individual buys shares in a company, they become one of the owners of the business. This then entitles them to a share of the distributable profits of the company that are known as dividends. Shareholders will choose who runs a business and are involved in making key decisions, such as whether a business should be sold.

While shares are most closely associated with the stock market, the majority of small businesses do not make it near a stock market in their lifetime. These businesses are more likely to issue shares in their company in return for a lump sum investment. This can either be from friends and family or from other businesses that are looking for capital to fund high growth, through formal equity funding finance.

Formal equity finance is generally available through:

• Business angel investors


• Venture capital firms


• Stock markets

These are investors who are willing to put up capital for a share in a growth business. The advantage of raising money in this way is that you will not have to pay the money back or pay interest to the investors. Instead, shareholders will be entitled to a share of the distributable profits of the company which are known as dividends.

There are many benefits to raising capitol for your business in this way. Issuing shares in your company on a stock market can provide:

• New financing that can fuel growth and development


• An exit strategy for founding investors who want to realize their investment


• A complete mechanism for investors to trade shares


• A market valuation for the company that can increase future financing options


• A valuable incentive for staff using shares or share options


• An acquisition currency in the form of shares that increase the businesses value


• A fast way to raise your business' profile

When you set up your business, you will decide on the level of share capital (the company's authorized capital) and its division into fixed priced shares. This will determine the amount of share capital the company will have and the division of the share capital. The founders of the company will sign the memorandum and state the number of shares they want. The shares are then issued upon incorporation.

Many small business owners choose to issue shares to family or friends in return for investment in their business, rather than accepting the offer of a loan from them. This way those closest to you can share in the potential growth of your business and you will not be obligated to make repayments. If you choose to do this you should formalize the agreement with family members or friends so you can avoid disputes that may arise in the future.

Employee share ownership schemes can offer employees a stake in the business, which can encourage loyalty and help you to retain key staff. They can also provide an incentive or reward for performance and can help recruitment. Many employees want to feel that they have an ownership in what they are doing and look for companies where this is possible through shareholding.