Investopedia defines a startup as a young company that is just beginning to develop. They come in multiple shades are usually small but are financed and operated by a handful of founders or one individual. Some of the key issues founders face would be in financing their startups. Advisedly, the best option is bootstrapping at the initial stages of the business by either using personal funds, funding from friends and family or other sources of grants. This ensures there would be minimal, or none of the costs usually associated with external funding.
However, when a startup is past its prototyping phase, which we would define as venture or ready to trade (versus seed or early startup) its founders would need to carefully consider how best to secure capital. The British Business Bank recommends equity investment is crucial to the growth and upscaling of a business. For example, nascent fast-growing fintech app, Revolut received £50 million funding in July 2017 from London VC Index Ventures.
Equity financing options have become more diversified as business owners seek tailored solutions suited to their specific business and revenue models. While investors are looking for better ways to guarantee returns and reduce the risks associated with venture funding. Moreover, a business could become profitable and buy back ownership, which may eliminate the concerns founders have regarding equity funding.
Put simply, equity is the stake of ownership in a business or company. To provide equity to an investor, a business must first be registered as a limited company. The number of equity shares is determined by the projected revenue of the business as well as the value of similar businesses. The more a founder(s) has invested in the business pre-equity financing the more the value of the company. Similarly, the business model, unique features, founding team and business stage all feed into the valuation.
Advantages of Equity Investment
-
The business has access to cash without the large interests or costs associated with loans;
-
Investment is made without guarantee, but with thorough risk assessment such that if a business fails or loses money there are no obligations on the founder(s) to pay back investors;
-
Equity investors would usually want to participate in the running of the target business bringing on board non-monetary value-add such as advise, relationship networks, business development and other forms of support.
Disadvantages of Equity Investment
-
Investors usually end up with a larger share of the business due to their increased risks;
-
Loss of sole ownership;
-
Investors have a legal right to be included in the day to day running of the business creating potential problems should differences arise. There are other investors who forego this right, called sleeping investors)
-
Investments and their associated returns need to be handled through complex tax structures that are determined by the domiciles of both the business and investors.
A startup in the UK seeking equity investments can approach Family offices, Banks, Commercialisation Companies, Corporate Investors, Accelerators, Angel Investors, Government, Private Investment Vehicles, Crowdfunding Platforms or Private Equity and Venture Capital firms. Each of these entities operate to specific stipulations which founders must be thoroughly informed about. The UK Government also operates the Seed Enterprise Investment Scheme(SEIS), an indirect assistance provided to startups meeting certain conditions. It provides tax-breaks for UK-based investors investing up to £150,000 in an SEIS approved venture.
For further enquiries and insights, contact our team.
E: info@bfsc.co.uk or T: 020 3637 6365.