Before you begin pitching to potential investors, you need to seek professional advice on whether equity finance is the best option for your business.
Equity financing is the raising of money through the sale of some portion of an organization’s ownership, usually represented as shares.
Equity financing is the sale of ownership shares in an organization to investors and in many ways leads to similar strategic considerations as those seen when an organization takes on debt. The biggest operational change triggered by equity financing is that the organization has a new set of owners.
Much like the implications of taking on debt obligations, raising equity obligates an organization to invest in its own productivity to satisfy relationships with new stakeholders.
The final sale of an equity stake, called the “exit strategy”, is critical for mission-driven organizations.
However, unlike debt financing, equity financing has the added complication that the investor becomes a part owner of the organization and this can greatly increase the complexity of the organization’s relationships. Unlike with debt, equity obligations do not require repayment per se, although organizations can redistribute their profits to shareholders by issuing dividends.
If enough of the equity in a company is sold to investors who do not believe in the organization’s social mission there is a risk that the company will not maintain the mission as a priority. The owners of the business therefore need to consider whether equity finance is really the best option for them before bringing any external investors into the picture. Ensure you seek professional advice from a financial consultant before making this decision. Cooperatives operate on a different principle with each shareholder having one vote regardless of the number of shares they own and there are usually restrictions on who can become a member and what interests members represent.
However, equity investors in corporations often expect to receive their financial return by selling their ownership stake in the organization in the future. However, while there are a variety of ways that voting rights can be restricted in a company’s articles of incorporation, any restrictions that make it difficult for investors sell their shares can also going to make it more difficult to raise equity financing in the first place.
Additionally, much like with debt financing, attracting both equity financing and donations at the same time is difficult. It is important to note that nonprofits cannot issue equity and are effectively “unowned” organizations. On the other hand, they may seek to improve their financial return by changing the organization’s priorities, possibly to the detriment of its social mission. Consequently it’s important that a mission-driven organization seeking equity investors work with people that believe in the mission.
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