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Equity Finance

Intro

It is important to remember that in raising equity finance you are selling shares which represent a part of your company.

Equity finance can come from a number of sources, including family and friends, business angels, venture capitalists, special equity funds and flotation.

Only around 2% of companies succeed in finding equity investment. You must have an exciting proposition with good growth prospects and a strong management team. Investors are generally looking for something beyond the concept stage.

The management team should be able to demonstrate sector experience and a track record of running a successful business.

In many cases the total funds required will be raised from a number of sources, perhaps angel funding, combined with capital or debt from specialist venture funds and even mixed with bank lending under a SFLGS.

Stages of company development and funding needs

Seed capital - pre-start - cash required for research or to develop a prototype

Start-up - you have researched the market but have no sales yet

Early stage - you have generated a few sales and need cash for marketing and operations

Expansion - you are generating revenue but need cash for new products or new markets

Business Angels

Business Angels are widely recognised as playing an important role in the provision of smaller amounts of risk capital to SMEs for seed, start up and early stage companies

Most angels invest less than £100k but they provide more than just money, normally playing a hands on role in the business and bringing valuable contacts.

Angel Networks

There are many organisations which provide a matching service, bringing together entrepreneurs seeking funds and a network of Private Investors. The investors may group together in syndicates to fund larger deals. Pegasus acts as an Approved Intermediary for Angel Bourse, probably the largest Angel Network in the UK and has close links with many others. The typical range of funding for one business through an Angel Network is between £100k and £2 million.

Venture Capital

Venture Capitalists will usually be looking for deals of £2 million plus and will be looking for an exit within three to five years through trade sale or flotation. They will want a significant stake and high return

Equity or Venture Funds

There are funds specialising in specific sectors or regions - often backed by Government agencies. These specialist funds and trusts offer investment in start up or early stage companies but they will be looking for matched funding from other investors or lenders.

Flotation or Market Listing

This is often referred to as an IPO - Initial Public Offering. By listing on one of the markets such as OFEX or AIM (Alternative Investment Market) companies can raise their profile and gain credibility whilst accessing larger capital sums. The drawbacks come with the costs involved and the associated regulation with not a huge amount of liquidity for the shares.

CVS - Corporate Venturing Scheme

The CVS was introduced to encourage larger corporate entities to invest in high risk trading businesses in return for tax concessions. The investment takes the form of a minority shareholding, typically around 20% and not more than 30%.

The tax incentives are available for corporate equity investment in the same types of companies as those qualifying under the Enterprise Investment Scheme (EIS).

EIS - Enterprise Investment Scheme

Some investors will want to maker sure that your company qualifies for investment under the EIS scheme which offers generous income tax and capital gains tax reliefs to investors in certain companies. Broadly speaking, the business activity for which the money is being raised should be conducting a qualifying trade wholly or mainly in the UK and the gross assets of a non-group company, or aggregate gross assets of the group, must not exceed £15m prior to investment nor £16m post investment