Whether your company is just starting out or has already achieved a level of growth, almost every business will eventually need capital to fuel expansion or tackle new projects. Equity financing is a tried-and-true way to secure this capital, but many entrepreneurs are unfamiliar with how it works.
What is Equity Financing?
Equity financing allows businesses to raise money by offering investors a stake in their company's ownership. Simply put, shares are exchanged for funding. The goal is to raise the capital needed to drive your company to the next stage of growth.
Equity financing can happen at various stages of a company's development, hence the term "round." Each subsequent round typically targets increasingly larger and more sophisticated investors. These rounds are often referred to as "pre-seed," "seed," "Series A," "Series B," and so on.
The goals of each round of financing may vary depending on the company. Some may seek capital to develop new products, while others aim to partner with investors who can provide valuable expertise and help guide overall company growth.
How to Prepare for Equity Financing
Investors need to feel confident that they're backing a well-managed, reliable business, which is why preparing a solid business plan is the first step toward seeking investment.
On the corporate side, your detailed business plan should outline your vision and projections, identify a solid internal structure, include current financial records, and provide proof of full payment of all provincial and federal taxes.
On the legal side, it's important to include non-disclosure agreements to protect confidential information, as well as strong protections for intellectual property. Ensure your minute books are up-to-date and that you have written agreements with employees, consultants and suppliers. You should also provide a clear record of all shares and shareholders.
A key step in obtaining financing is collaborating with potential investors to draft a letter of intent (LOI). This document should clearly outline the intentions, terms, and conditions of the investment. While LOIs are usually non-binding (except the clauses on exclusivity and confidentiality), they set the stage for due diligence on your business's financial, legal, and technical aspects.
The due diligence process paves the way for further negotiations and closing the deal.
Equity financing is a powerful tool for businesses of any size to achieve their growth objectives. However, the key to a successful funding round lies in careful and meticulous preparation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
