There are multiple reasons why a company needs money: as a startup, to expand into new locations, to develop a new product, or acquire another company. Whatever the reason, a common way of getting an influx of capital into your budget is by using equity investor. Before you begin seeking investors, make sure that you understand the ins and outs of this type of investment.
Equity investors are people who invest money into a company in exchange for a share of ownership in the company. Typically, equity investors have no guarantee of a return on their investment, and may lose their money should the company go out of business. In the event that the company is liquidated, the equity investor may be entitled to a share of the assets.
These investors often expect certain benefits to offset the risk of their investment. For example, an investment agreement may stipulate that the initial investment be paid back over a specific number of years, followed by a share of the profits after the investment is paid off. The terms of an investment agreement can be specified by the company and the investor – and should be considered fair by both parties.
For their investment, equity investors may receive shares of stock – which can rise and fall in value based on current market conditions. These stocks may be bought or sold by the investor through the stock market or other trading platforms.
An investment brings elements of risk, and the equity investor must balance the potential for risk with the possibility of reward. For both the investor and the company, the benefits of the investment must be worth the inherent risk. Detailing the specific requirements for the investment and potential payoffs/losses should be taken care of before the investment and should be scrutinized by financial advisors.
We recommend you read further for understanding the different financing alternatives.