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When to Use Equity

Equity is one of the most sought after forms of capital for entrepreneurs, although certainly the least available. There are many reasons, among them the fact that entrepreneurs do not have to tie their personal credit to the financing needs of the business.

Equity is valuable when the business requires an investment that will involve a high degree of risk without an immediate payback or return of capital. That's why certain companies that require a long runway before they will start generating cash flow look to equity capital. They cannot be stuck making monthly debt payments when they don't yet have income!

There are two disadvantages to using equity capital - it's very hard to get and you will have to give up a percentage of your company to get it.

The reason the probability of getting an equity investment is low is simply because there are far more people looking for equity capital than there are those who write checks. Consider that over 6 million new businesses are incorporated in the U.S. each year yet venture capitalists alone only fund around 3,000 companies annually. That means the competition for these dollars is fierce.

The other concern for entrepreneurs involves giving up a percentage of their company. Once you sell a stake in your company, you're not likely to get it back. That means you're now married to an investor for the life of the company, and that can bring its own challenges.

Despite the challenges, many entrepreneurs are aggressively pursuing equity investors for their startups. Many cite the benefit of having other partners in their deal to help them grow the business and provide more connections, while others frankly point out that it's the only viable way to fund the business.

When equity is available, most entrepreneurs jump on it. That said, most entrepreneurs are not given this option, and therefore must pursue other options like credit and debt to bring their companies to market.

Buying & Selling a Business