You are here

Equity Financing

29 April, 2015 - 15:03

Equity financing is generally considered less certain than debt financing. Equity financing is also typically where non-cash assets such as equipment, skills, and land are invested alongside regular cash. This is the category in which we also find venture capital, shares of stock, angel investors, and more. The terms that are used to describe the equity financing relationship are more varied and, as such, will be simply dubbed equity investors. Later on, more proper names will be provided which, for the time being, are immaterial.

The return of equity financing is the claim on a business's profits; not just today's profits, but in modern companies that issue stock, all future potential profits as well. For this reason, i.e. because most personal finance does not involve the debtor making a profit, almost all of personal finance is debt financing. The exceptions will be noted shortly.

While it's true that in equity financing, the equity investor still has some claim on the business' assets, the creditor's prior claim renders this point moot from a practical standpoint. What protection, then, is offered for equity financing? The claim to management rights. As an equity investor, with a few notable exceptions, you are granted the right to do everything in your personal power along with the other equity investors to make sure that the business goes in a profitable direction.