This article is the follow on from the Raising Finance overview article. This article seeks to explore equity finance in greater depth allowing you, the business owner, to decide upon whether raising equity finance is suitable for your business, and also informing you of the practical considerations involved in the process.
What is equity finance?
Equity finance is a means for a business to raise capital. The capital is raised by the company via allotting shares to the investors in return for their money. As a result of this, a key consideration of equity finance is that ownership of the company is being transferred away from the original owners/ founders.
The capital is raised in rounds of different classification, depending on which stage the company wishing to raise capital is at. These include the following:
- Seed Funding
Seed funding is the earliest stage funding. The capital is normally used to develop the desired product and ascertain the products users or consumers.
- Series A
Series A funding takes place further down the line and is a progression on seed funding. Series A funding capital is normally used to conduct market research and finalise the product. The company will need to demonstrate that the seed funding was used optimally and that Series A investors can make a high return.
- Series B
At the Series B investment stage, the product should already be on the market. The purpose of the funding is to allow the company to increase its market share against more established competitors.
- Series C
Series C funding usually involves private equity/ venture capital investors and is an influx of capital to an established business in its chosen market, the money will be used normally to take on a new financial venture such as to expand the company’s product range or to make an acquisition.
Investment: The key documents
- Investment Agreement
The investment agreement is the core document, which documents the exchange of the investors’ money in return for shares. The type of shares and associated rights will be detailed in this agreement. Key considerations could include whether the investor has a preferential right to a dividend or whether or not the investor has voting rights attached to their shares. The payments may also be “Tranched” i.e. split into segments rather than all being made up front. The Tranches may be linked to specific performance milestones of the company.
Importantly, the warranty schedule in the investment agreement will also need to be negotiated. The warranties are a set of promises the founders (warrantors) give to the investors as to the state of the company. If these warranties transpired to be untrue the investors would have a claim for breach of contract against the warrantors. However, the warrantors can disclose against the warranties in the disclosure letter, meaning that the investors would not have a claim for breach of that warranty in those circumstances.
If you want to discuss how best to raise capital for your business please feel free to get in touch with someone from our corporate team who would be happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.
The information contained in this article is for information purposes only and is not intended to constitute legal advice.