Ownership
Equity financing involves selling a percentage of ownership in the company to an investor. The advantage of equity financing is that the company does not incur a debt obligation that must be repaid. As the company makes a profit, the investors may be paid dividends and their ownership interest will
increase in value. The biggest disadvantage of equity financing is that every time you sell ownership, your percentage of ownership is diluted or decreased. Depending on the stage of funding and the amounts involved, you may have to give up varying degrees of control of your company.
If things go badly for a company and its assets are liquidated, equity investors are paid back after debt holders. Equity investors realize this going in and therefore usually consider a company's debt-to-equity ratio—the amount of debt a company has versus the amount of equity or paid-in capital. If a company has too much debt, it may not be able to meet its obligations to pay back debt from revenues, which could result in a foreclosure. On the other hand, if a company has sold too much equity, the return on investment might take a long time. It is all a balancing game.
Schedule: It is time and money well spent to forecast how much capital you will need to fund the company and also how long you anticipate it will take to pay lenders back or give investors a return or an exit.
The type of equity securities that a company issues to founders and investors will depend, in part, on the amount of capital needed to be raised and the number and type of investors needed. If the company does not need large amounts of capital to accomplish its goals, one form of securities may be all that is needed. If the company needs to raise a significant sum of cash, creating different classes of securities could be advisable.
