Sources of equity financing
Capital is any form of wealth employed to produce more wealth.
Three forms of capital are commonly identified:
- fixed capital -- used to purchase a company's permanent or fixed assets
- working capital -- represents the businesses temporary funds and is used to support the business as normal short-term operations
- growth capital -- requirements surface when an existing businesses expanding or changing its primary direction
Various sources of equity capital available to entrepreneurs:
- owner's personal savings -- most common
- friends and family members
- Angels -- private investors who not only invest their money in small companies, but they also offer valuable advice and counsel to them
- limited partners -- some business owners have success financing their companies by taking on limited partners as investors or by forming an alliance with a corporation
- venture capital companies -- for- profit professional investors looking for fast-growing companies in hot industries
- going public
When screening prospects, venture capital firms look for competent management, a competitive edge, a growth industry, and important intangibles that will make a business successful. Some owners choose to attract capital by taking their companies public, which requires registering the public offering with the SEC.
Going public involves:
- choosing the underwriter
- negotiating a letter of intent
- preparing the registration statement
- filing with the SEC
- meeting state requirements
advantages of going public
- can raise large amounts of capital
- improve access to future financing
- improve corporate image
- gaining listing on the stock exchange
disadvantages of going public
- dilution of the founders ownership
- loss of privacy
- reporting to the SEC
- filing expenses
- accountability to shareholders
Here are some other alternatives available to entrepreneurs wanting to sell shares of equity to investors rather than going to the complete registration process;
- regulation S-B
- regulation D (rule 504)
- Small Company Offering Registration (SCOR)
- regulation D (rule 505 and Rule 506)
- Private Placements
- Section 4(6)
- Rule 147
- regulation A
- direct stock offerings
- foreign stock markets
