16 Sep A Look Into the Pros and Cons of Equity Financing
It’s no secret: growing or jumpstarting a business requires fresh capital. Yet while there’s certainly no shortage of options for raising the funding, entrepreneurs need to scale up, the decision-making process around which type of capital and through which provider, be it in the form of a loan or equity financing, can be just as stressful as dealing with the growth hurdles themselves.
The biggest concern for many business owners is weighing the costs and benefits of remitting equity in order to accept financing from angel investors or venture capitalists. While there are undeniable appeals to these types of contracts, there’s also much to consider regarding your goals and risk tolerance as an entrepreneur. Let’s take a close look at the pros and cons of equity financing as well as alternative capital solutions that may be available to you as an e-commerce seller.
Pros of Giving Up Equity for Capital
When you partner with VCs or angel investors, you give up a percentage of ownership in your business in exchange for the capital you need to take your business to the next level. At first instinct, this is a less-than-ideal situation, but there are a few upsides to the terms.
While you do sacrifice shares in your business, the value of those shares will remain in flux. Meaning: if you invest your capital successfully and consistently increase the valuation of your business, a lesser percentage share could actually be worth more down the line than if you’d refrained from accepting capital at all.
VCs and other reputable investors also typically have a broad network of resources and potential partnerships that they can leverage to help you grow your business. If they are niche to your particular industry, they may even be a valuable resource themselves to help guide you through the more harrowing stages of growth.
All that said, most of these benefits are balanced by equally notable downfalls that you should keep in mind when looking into equity financing.
Cons of Giving Up Equity for Capital
When you offload shares to VCs or other equity investors, your current shares are diluted, meaning they account for a lesser percentage of overall ownership. Again, this doesn’t have to be a terrible thing, but unless you can guarantee your business will not only stay afloat, but accrue value over time, it’s a big risk for you and your co-founders, existing shareholders, etc. At the end of the day, you’re still getting less stock in your business whether it fails or knocks it out of the park.
Owning a chunk of equity also gives investors the right to a certain amount of creative and strategic control over your business. You cease being the pilot of your operation and instead have to start answering to a board before you make any big moves. For many self-made entrepreneurs who became sellers largely to escape being an “employee”, this is a major drawback.
And don’t think for a moment they aren’t going to exercise that ability… If they invest big bucks, they will probably expect a big return (and under a deadline). When equity investors don’t feel that their money is being allocated appropriately, best case scenario they step in, worst case scenario they replace you from your own business. While it sounds extreme, it is an unfortunately common reality for many mid-stage entrepreneurs. In fact, between 20 and 40 percent of founders are upseated from their roles after accepting VC money.
IS THERE A MIDDLE GROUND?
What makes these investors most alluring is their capacity to cough up substantial capital quickly and broker introductions to fellow industry titans. However, there are other financing options that boast the same perks without the underlying consequences.
Most of the time when business owners seek capital, they really only need it to overcome a temporary roadblock in the way of that next stage of growth. They aren’t looking for a lifelong partnership and/or to be bought out of their operation, yet that’s the fate they’ve been sold through the traditional “invest to scale” narrative.
Not to say that accepting funding isn’t vital for businesses to thrive…it is. In fact, 29% of small businesses fail for lack of sufficient capital. But by opting for growth capital through an independent or fintech provider over a VC or angel investor, entrepreneurs can rest assured that their pilot seat and shares are secured for the long haul.
HOW YARDLINE CAN HELP
When you work with Yardline, you also get the added benefit of a vast partner network and Seller Success Team, comparable to the connections and advice that make the VC model initially appealing. Where Yardline differs from and eclipses VCs is the hands-off/on-call nature of our added value propositions. While we have experienced sellers, e-commerce industry experts, and fellow successful entrepreneurs at your service to help you profitably scale, since we don’t own any direct influence over your business, the way you spend your capital is ultimately up to you.
Paying us back is tied to a fixed percentage of your revenue going forward, so you also don’t have to suffer the pressures of a rigid timeline or “going for broke” just to pay down your debt.