Equity financing is money provided by individuals and professionals who invest alongside company management in young, fast growing companies that have the potential to become economic contributors in the local economy. Equity financing can be an important source of capital for start-up companies. Outside equity is invested by Angel Investors, Venture Capital to investors or by selling stock in the company through an Initial Public Offering (IPO).
Angel investors are high net worth individuals who make small individual or group investments in promising startups that typically cannot quality for some or all of the debt financing needed for the startup of the company. Angel capital is usually the first outside investment after the funds of the entrepreneur, family and friends have been injected into the company.
Venture capital and other forms of private equity firms are pools of capital, typically organized as a limited partnership, that invests in companies that represent the opportunity for a high rate of return within five to seven years. Venture capital usually follows the earlier seed and angel investments. The venture capitalist may look at several hundred investment opportunities before investing in only a few selected companies with favorable investment opportunities.
Each equity investment will involve a term sheet defining the terms of the investors. These are negotiable and will vary extensively for each investment.