Common Forms of Equity Financing

When a startup is seeking funding, equity financing is a common option for founders. Unlike debt financing, equity financing provides startups with money for short-term needs—including building a team and creating a minimum viable product (MVP )—without going into debt. With equity financing, startup founders don’t repay the entities or individuals who provide equity financing. Instead, they give those funders equity in the startup. The idea is that, once the startup expands and gains large-scale notice and interest, the parties providing equity financing will earn at least what they invested originally and, ideally, much more.

There are a number of different forms of equity financing for a startup to consider. Our startup lawyers can provide you with more information about these forms of equity financing, and we can discuss which type of option — or perhaps more than one of these options, in many circumstances — is best-suited to your startup’s needs.

Angel Investors

Angel investors often provide equity financing to startups in their early stages of financing. Angel investors are typically individuals who have funds to invest in a startup in exchange for equity. Individual angel investors tend to invest less frequently than venture capital firms, which we will discuss below, but they also tend to expect less equity in exchange for the funding they provide.

Angel investors can be especially beneficial for startups that may not have a clearly delineated plan for growth potential but have a particularly exciting idea that an individual angel investor is excited to support. Depending on the specific angel investor, they may or may not want to have some control or input into the operational aspects and growth of the startup. Other angel investors prefer a passive role in the background while the startup founders make all decisions.

Venture Capital (VC)

Venture capital, often described in brief as VC firms, are risk capital companies that invest money from individuals and entities, and provide equity financing to startups. VC equity financing is a form of private equity. Whereas angel investors can get excited by a specific kind of startup idea that speaks to them, VC firms are much more focused on the likely growth and success of the startup. As such, VC firms often want clear evidence that shows the startup’s potential for growth, and they also tend to be more involved in the startup in ways that include providing strategic advice.

VC firms also tend to expect more equity, but they also tend to provide more funding.

Structure Your Equity Round to Protect Your Upside

Are you considering equity financing for your startup? You should reach out to one of the startup attorneys at Triumph Law to discuss your options. Contact us today for assistance with questions pertaining to raising capital and other matters concerning your startup’s funding.

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