Equity refers to money invested by a third party in exchange for ownership in your business. The investor will be repaid and earn a return through any of the following methods:
- dividends generated from business income and paid out to investors
- the eventual sale of the investors’ shares during an acquisition of the business by a third party
- the repurchase of the investors’ shares by the business
- the sale of the investors’ shares in the public market if the business becomes publicly traded
Investors willing to make equity investments in early-stage technology businesses typically seek higher investment returns than those earned by lending money to businesses and investing in mutual funds or specific publicly-traded shares in technology businesses. Keep in mind that the presence of these third-party investors will dilute (make smaller) your ownership position in a business and that many outside investors willing to fund early-stage businesses want to take a more active and involved role in your business.
Regardless of the stage of funding, when issuing shares to investors, you must comply with applicable securities laws in your province, so ensure you get advice from legal counsel.
Some considerations regarding equity:
- Can you or your family and friends afford to lose your personal savings if the business does not work out?
- Are you willing to work with outside investors in your business?
- Does your business meet the criteria to attract outside investors?
Sources of equity:
- Your personal savings, if it is readily available. Your cash investment may give others the confidence in your business to invest.
- Money from family and friends, sometimes referred to as“love money”—funds that your family and friends have readily available and which they are willing to invest as equity in your business.
- “Angel” investors—they are seasoned successful professionals looking to invest a portion of their savings in promising businesses to earn a larger return than more traditional investments offer. Angels may wish to play an active role in management or governance of your business. Angel networks exist and represent a group of angels who review business plans and potentially invest as a group in a business. The Canadian National Angel Organization publishes an Angel Directory for North America on their website. This provides a valuable resource for entrepreneurs seeking financing.
- Venture capital firms—these organizations offer financing in exchange for significant ownership of the business with an expectation of high financial returns and a high level of involvement in your business. Venture capital investors only target high-growth businesses. Canada’s Venture Capital& Private Equity Association and the U.S. National Venture Capital Association both provide membership lists online for active venture capital firms.
The Government of Canada’s Sources of Financing Database supplies a comprehensive list by specific geographic region of all organizations that provide financing of all types. It offers a valuable resource for entrepreneurs considering financing alternatives and trying to identify potential investors for their business.
Canadian Bankers’ Association. Retrieved April 9, 2009, from http://www.cba.ca/lang.php.
Canada Business Services for Entrepreneurs. Retrieved April 7, 2009, from www.canadabusiness.ca.