A look at equity investments

People who are starting a business inevitably run into what can potentially be a hurdle and even put the idea of a business on hold - how to fund it. Starting a business, depending on what type of business you are starting, can be very pricey.

Fortunately however, there are many options for funding a business. One of these is through equity investments.

What are equity investments?
Equity investments are those that come from investing in a newly formed business in exchange for owning part of your business. So an equity investor (also called venture capitalist) will cover the start-up costs of a business, and then own a portion of it for the remainder of its existence.

This is advantageous for equity investors for a number of reasons. Equity investors, if they have chosen a business wisely, then own portions of what could potentially be very successful enterprises. (Staples is one example of a successful company funded in such a way.) As such, they have a certain amount of control over it. However, it is also risky because if the business tanks, they typically don't get their money back.

Pros and cons of equity investing
As with anything, there are definite pros and cons when it comes to equity investing. Consider the following advantages and disadvantages:

Pros


• Investors are experienced. Business owners who secure equity investors have experience on their side. Because their own money is tied into the business, they want it to succeed. As a result, they will offer valuable advice and support that can help your business succeed.


•  You don't have to pay it back. When people opt for a loan to start up their business, they have to pay it back plus interest. If their business fails, this could put them in a real financial bind. However, with equity investments, even if the business fails, the owner does not have to repay the equity investors. (Unless the risks of the business were not very clearly outlined in the beginning.)

Cons


• Less control of your company. Most people start their own businesses because they want to completely control their company. When you use an equity investor, however, you will have your investors very involved in your business, and you must keep them informed of the business decisions you want to make. If they disagree with the way you are running your business, or if they don't think you are being ethical, legally they can and will sue you.


•  Less profits. Equity investors put a lot on the line when investing in a business. For that reason, they will take a much larger share of your profits than you would have to pay back if you ended up taking out a loan to fund your business. In the end, this means you will get to keep less of your profits.


•  Hard to obtain. It can be difficult to find an equity investor who is willing to help you fund your business. Oftentimes, they will only do so when the potential for very large profits is good, and you have to prove to them that your business has a greater than average chance of succeeding and making a lot of money.

Equity investments can be advantageous for both the investor and the business owner. At the same time there are downsides for both parties, whether it be the potential loss of a great deal of money or the inability to run your own business exactly the way you want to.

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