Startups usually raise equity capital through investors (angel investors) and venture capitalists. Once equity capital is raised, the ownership of the company becomes diluted. It's important that founders understand how to sell equity responsibly so that they do not mistakenly sell their entire company.
Capital is one of the most crucial things needed to run any kind of business. It plays an indispensable role to ensure the day-to-day operations and management of the business. Every business needs capital to pay for salaries and overhead costs; purchase tools, infrastructure & machinery; to increase business productivity and improve the quality of output amongst other things. Capital is a major key for the business to properly function in the market or ecosystem.
There are four key types of capital;
For startups at their very early or growing stage, founders tend to find various sources to raise capital such as self-financing, crowdfunding, loans & debts, asset sales and issuing company shares (equity).
Equity is the amount of ownership that shareholders of a startup have in the business. It can also be referred to as the percentage of the startup’s stock sold to its stakeholders, i.e the investors, advisors, employees etc.
Equity Capital is generated through the sale of shares of a company's Stock. Startup founders often sell shares of their startup in exchange for money to run the business. Unlike Debt Capital where the capital is expected to be paid back, cost of equity capital refers to the amount of return on investment shareholders expect based on the performance of the larger market. These returns come from the payment of dividends and stock valuation.
Startups usually raise equity capital through investors (angel investors) and venture capitalists. Once equity capital is raised, the ownership of the company becomes diluted. Founders must record and track all ownership rights properly to prevent future issues. A great way to do this is by using Raise, a platform to manage equity & cap tables. Stakeholders need to be able to review their holdings and also see possible scenarios of the impact of their investments.
When distributing equity to investors, the percentage of equity that an investor will typically receive is often highly dependent on the company’s valuation and the size of the investment. Some great measures to take before making a decision include:
Aside from selling shares to investors, startups can also offer employee stock options to employees to help them be more invested in the growth of the business. It’s a great way for startups to hire and retain the best talents, especially at a time when the startup is gaining some sort of traction.