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Equity Financing
"It is time I stepped aside for a less experienced and less able man." -- Professor Scott Elledge, on retiring from Cornell University

Equity financing requires that you sell an ownership interest in the business in exchange for capital. The most basic hurdle to equity financing is finding investors who are willing to buy into your business; however, the amount of equity financing that you undertake may depend more upon your willingness to share management control than upon the investor appeal of the business. By selling equity interests in your business, you sacrifice some of your autonomy and management rights.

The effect of selling a large percentage of the ownership interest in your business may mean that your own investment will be short-term, unless you retain a majority interest in the business and control over future sale of the business. Of course, many small business operators are not necessarily interested in maintaining their business indefinitely, and your personal motives for pursuing a small business will determine the value you place upon business ownership. Sometimes the bottom line is whether you would rather operate a successful business for several years and then sell your interests for a fair profit, or be repeatedly frustrated in attempts at financing a business that cannot achieve its potential because of insufficient capital.

Here are the most common small business options for equity financing:

  • forms of business organization — your organizational form influences how willing others will be to invest in your business
  • business combinations — cooperative arrangements with other businesses for sharing costs
  • venture capital — money and expertise for hot businesses
  • SBICs — the government's venture capital businesses
  • angels — private investors who want to make money and also help small businesses
  • initial public offerings — going public can mean big gains, but it's not for everyone
  • alternatives to going public — limited private offerings of ownership interests
  • franchising — a shortcut to getting started, but don't expect to run the whole show
  • ESOPs — employee stock ownership plans that allow employees to own a piece of the business; can boost production and provide leverage for additional financing