Advantages And Disadvantages of Equity Financing

The main advantage of equity financing is that there is no loan to repay. The main disadvantage is giving up control of the company.

Author: Brad Nakase, Attorney

Email  |  Call (888) 600-8654

Equity Financing Example

Jeff is the owner of a tech startup in Los Angeles, California. Because his company is so new, Jeff needs money to improve cash flow problems. Because of some proprietary software, Jeff feels that investors may be interested in his business. Therefore, he decides to pursue equity financing. He is willing to offer 25% equity stake in his business to an investor who is willing to give him $200,000 for equipment and payroll. But before he commits to the idea of equity financing, Jeff is careful to review the advantages and disadvantages of this kind of funding solution.

What Is the Definition of Equity Financing?

According to an Intuit Survey, 75% of small business owners reported that they relied on personal savings to start their companies. But starting a business is one thing and growing it is quite another. A business owner will likely require additional financing to keep a business growing apace. But it can be hard to get this kind of funding, especially for new business owners.

One major way of raising capital is for a business to look into equity financing. This article will review how equity financing works, as well as how a business can get it. Also, we will explore the possible benefits and disadvantages that come with this financing option.

Equity financing is a well-known method by which entrepreneurs raise money for their startups without coming into debt. In this case, the business owner sells shares of the company to equity investors in exchange for money.

While this sounds easy, getting equity financing is a major decision for a business that can have long-lasting effects. Before jumping into equity investments, it is important that a business owner understand the process of getting this kind of financing, as well as its pros and cons.

What Are the Pros of Equity Financing?

The main advantage of equity financing is its short-term affordability, availability, and limited risk. A business owner may not be able to get traditional financing because of his or her bad credit score, but equity financing is still on the table. This mas that the short-term cost is typically lower than debt financing because there are no fees or interest.

Also, because a business owner pays for equity financing in the form of business shares, he or she does not need to pay investors back if the business fails.

Some individuals prefer equity financing to business loans because they do not have to pay back money in a set period of time. If a business owner is worries about making loan payments on time, then equity financing may be a valid option.

What Are the Cons of Equity Financing?

The biggest negative associated with equity financing is the possibility of losing control of one’s company. Because equity financing requires that a business owner give up company shares, this kind of financing can cause an owner to lose some or all of his or her ownership rights. In just this manner, Steve Jobs was forced out of Apple.

Also, by selling ownership shares, a business owner receives a smaller percentage of company profits, which limits their earning potential.

A small business owner should be conscious of their earning ability. If selling equity shares limits future financial gain, then this may not be the best option to solve a cash flow problem.

If a business owner takes out a traditional loan, then he or she must repay the lender in full and on time. While he or she may be worried about paying the loan back on time, it is possibly better than worrying about losing control of one’s business. If a business owner wants to maintain control of his or her business, then a traditional loan may be a better option.

How To Get Equity Financing

When looking into equity financing, a business owner may go to several sources. Common varieties of equity financing include the following:

  • Angel investors or venture capitalists
  • Friends and family
  • Small business investment companies
  • Crowdfunding

The process for getting equity financing may be different depending on the funding source one selects. Venture capitalists require a business plan that show a high rate of return for their investment. Usually, this amount will need to be at least 25%, but it can be much more.

There will be similar challenges with Small Business Investment Companies. That said, these companies are SBA-backed, which means that they generally have less strict qualification requirements.

Other financing sources, such as angel investors and crowdfunding, may be as simple as convincing people that one has a good idea for a business. If the investors like the business idea they will be willing to offer money in exchange for ownership or some other benefit.

Still, the best chance one has to impress investors is to produce a well-crafted business plan. It will also be helpful to hire a lawyer to create contracts addressing the details of the equity deal.


For the business owner who needs a large amount of capital to start or grow a company, equity financing may be a solid option. However, a business owner should be comfortable with the equity financing deal, as well as be prepared to give up some or full control of his or her business.

Please tell us your story:

1 + 3 = ?

See all blogs: Business | Corporate | Employment

Material Breach of Contract

A material breach of contract occurs when a party fail to perform a contract's terms making the primary purpose of the contract not met, the breach is considered material.

What Type of Business Is a Partnership?

A partnership is the simplest business structure where two or more people are owners of a business. The types of business partnerships include general partnership, limited partnership, and limited liability partnership.

What Is Company Culture?

A company culture is how things get done in the workplace. Company culture can more be described as core values or operating principles used to set the tone for the company's overall operations and success.

What is a sole proprietorship?

A sole proprietor is someone who owns an unincorporated business by himself or herself. A sole proprietorship is a business that can be owned and controlled by an individual.

Sole Proprietorship vs. LLC

Sole proprietorships are popular for self-employed professionals, freelancers, and contract workers, while LLC offers personal liability protection than sole proprietorship.

Is it legal to sell homemade food in California?

Yes, you can sell food from home so long as you have California-required health and food handling permits and business licenses. You must get a permit to sell food from home from the county health department in California. 

How to Incorporate a Small Business in California?

To incorporate a small business in California, file an Articles of Incorporation with the California Secretary of State's office. After you file the Article of Incorporation, create corporate bylaws, and elect your initial director(s).

6 Steps for Planning a Business Grand Opening

1. Create Goals for the Event, 2. Begin Planning Early, 3. Stick to the Budget, 4. Have the Right Insurance, 5. Advertise Before the Event, 6. Offer Food and Entertainment

10 Facts About Business Before Starting A Business

1) More than 50% of new businesses survive their first year in business. 2) Less than 50% of family-owned businesses are passed to their children. 3) 40% of business experience challenges in the supply chain…

S Corp vs C Corp – Differences and Benefits

The main difference between an S Corp and a C Corp is that for a C Corp, the corporate profit is taxed to the company, and the dividends to the shareholders are also taxed. In contrast, for an S Corp, the profit is taxed to the shareholder but not to the corporation. Generally, small businesses are S Corps, and major companies are C Corps, e.g., Apple, Microsoft, Caterpillar, John Deer, etc.

How to Form a Corporation in California?

To form a corporation in California follow these steps: 1) Write a one page Article of Incorporation, 2) File the Article of Incorporation with the California Secretary of State, 3) Elect corporate board of directors, 4) File Statement of Information with Secretary of State.

What are the benefits of a corporate lawyer?

The are many benefits of hiring a corporate lawyer for your business which includes: avoiding litigation, enforceable contracts, develop employee policies, proper licensing, etc.

What is Commercial Litigation?

Commercial litigation refers to litigation (lawsuit) that involves commercial or business disputes in court between two or more parties.

How to Get Rid of a 50 50 Business Partner.

How to Get Rid of a 50/50 Business Partner. One method to get rid of a 50/50 partner is to file a business partnership dissolution in the state your company was formed to end the partnership.

Personal Assistant Scam

A personal assistant scam typically involves a perpetrator putting out an ad to hire a personal assistant. Then, when the perpetrator purportedly hires the personal assistant, the assistant is asked to buy something with their own money with the promise to be repaid. The perpetuator then disappears after receiving the goods.

Fiduciary Responsibility Definition

A fiduciary responsibility refers to an organization that must put another person’s best interest first. A fiduciary duty is the highest standard of care in law. For example, a lawyer owes a fiduciary responsibility to the clients, a doctor owes a fiduciary duty to a patient, and a trustee owes a fiduciary duty to a beneficiary.

What is profit formula and how to calculate profit formula?

A business profit is revenue minus expenses. The profit formula in accounting calculates the net gains or losses incurred by the business for a period by subtracting the total expenses from the total income: Total Income – Total Expenses - Profit

What is invoice reconciliation?

Invoice reconciliation is the process of matching bank statements to incoming and outgoing invoices. The purpose of invoice reconciliation is to confirm that the data entry is correctly matched with every invoice.

What Makes a Verbal Contract Valid

A verbal contract is valid when contractual elements are satisfied, such as evidence of an offer, acceptance of the offer, and consideration which is an exchange of value between the parties.

Marketing Transport Company

The easiest way of growing your list of clients is to schedule a meeting with businesses that do a lot of shipping and introduce your transportation company. Then, engage an internet presence to market your transportation business.

What Can You Do with a Toxic Business Partner?

A bad partnership could lead to profit loss and toxic company culture. The first way of dealing with a toxic business partner is to schedule a meeting to discuss your concerns calmly.

Disruptive Business Model

Disruptive business models are disruptive innovations that bring new business ideas or technology to existing markets. A disruptive business does not fit the profile of a standard business model. Amazon is considered as one of the world's most disruptive companies.

How to Get a Business Loan with Bad Credit

For small business owners with bad credit, the easiest place to get a business loan is with the SBA. Although not easy, entrepreneurs with bad credit can get a small business loan.

How to Get a Small Business Grant

You can get a small business grant from the Small Business Administration. Also, check your local government for small business stimulus grants.

Pros and Cons of Etsy

Etsy Pro: Your products are given a large audience, and you easily sell your merchandise. Etsy Cons: You can only sell handmade or vintage merchandise, and there are many competitors.

What is a Breach of Contract in California?

A breach of contract in California arose when a party to a contract failed to achieve a legal duty the contract created. When a party to a contract fails to fulfill the terms of a binding contract, they are liable for damages for breaching the contract.

Business Equipment Leasing Pros and Cons

One advantage of equipment leasing is that you don’t need to come up with all the cash to buy the equipment. One disadvantage of equipment leasing is higher overall costs than outright purchasing the equipment.


The main difference between an LLC and a DBA is that an LLC is a business entity, and a DBA is a registered fictitious business name. Sole proprietors, general partnerships, and LLC can register for a DBA.

See all blog: Business | Corporate | Employment

© Copyright | Nakase Law Firm (2019)