Leveraging Equity Stake as a Small Business

 

One of the toughest hurdles small business owners face is accessing capital to fund their growth. This is because, to them, sometimes, traditional funding options such as loans and debt financing are not favourable. This leads them to consider liquidation or total shutdown.

What small business owners don’t know is that there are better options to consider, one of which is equity stake.

An equity stake is the percentage of a company that an investor owns. It’s represented by the number of shares an investor possesses. However, the agreement between the investor and the business owner determines this percentage. Therefore, dear business owners, instead of opting for a loan and owing, choose to sell parts of your shares.

Now that we know what equity is let’s discuss how to go about it.

• Prepare Your Business for the Change: First things first, to attract investors to own a stake in your business, put your company in order. Become fully present in your organisation and ensure the valuation of your enterprise is measured to help you decide how much equity you will be offering. After doing this, prepare the legal documents for equity financing, like shareholder agreements, term sheets, and more. This would guarantee that all agreements are clear, fair, and compliant with regulations. Lastly, be transparent about upcoming changes with your talents so that grapevine news won’t make your company lose treasured staff members.
• Identify Potential Investors: This part can be tricky because you want investors who align with your business goals and values. Before offering an equity stake to any investor, you must first research adequately about them and strategically approach them. Some investors to consider are private equities, venture capitalists, angel investors, etc.
• Pitch Your Business: Once you find a prospective investor who aligns with your organisational goals and values, prove yourself through your pitch. To do this, you must make your offer as compelling as possible. Highlight your business’s value proposition, market potential, and the benefits of investing in your company.
• Terms Negotiation: Successfully bringing in an investor is not where the journey ends. It is important to balance negotiation. Finding a middle ground is significant for your negotiation to go smoothly; this means you must not be too giving or stingy with your offer, as this can be detrimental to your business.
• Cordial Investor Relationship: Once you have effectively brought in investors, you must be intentional about maintaining a positive relationship with them. Keep them informed on your business progress, challenges, and successes. Remember, regular communication builds trust that can bring about additional support in the future.

In conclusion, equity stake is worth leveraging. It is a strategic move that can reform your small business’s entire operation. If you take the right approach, your company stands the chance to harness the benefits of equity and achieve remarkable growth and success.

 
FAQs

Q1: What kind of investors typically go for equity stake?

A: The kind of investors that usually go for an equity stake are private equities, venture capitalists, angel investors, and sometimes family and friends.

Q2: Can I buy back my equity stake in the future?

A: Of course you can! However, the investor must be willing to negotiate with you as the valuation of your business would have increased.

Q3: Can I have more than one investor? If yes, is it alright to issue them with different classes of shares?

A: Yes, and yes again. You can sell portions of your business’s shares to more than one investor, and you can also decide to determine the amount of share you are willing to offer to each of them. However, it is advisable to start with one investor, especially if it’s the first time you are offering equity stakes.