Equity financing is raising money by selling part of your company. The investor pays cash for new shares and becomes a part-owner of the business. They get their return from dividends or when the business is sold. In the UK it’s usually called equity finance, and equity funding and equity investment mean the same thing.
What the founder gives up is a share of the business. A founder who sells 20% ends up with a smaller piece of a bigger pie: 80% of a business that now has the money to grow.
I’ve seen these deals as an investor, as a lender and as the founder raising the money, over 25+ years of funding more than 750 businesses with over £1bn and raising £250m+ for my own companies.
How an Equity Deal Works
The company issues new shares and the investor pays for them. The money goes into the business, not the founder’s pocket. Selling shares a founder already owns is a different transaction, called a secondary sale.
The number of shares the investor gets depends on what the business is agreed to be worth before the money goes in. This is called the pre-money valuation. If the founder and the investor agree the business is worth £2m and the investor puts in £500,000, it’s worth £2.5m afterwards and the investor owns 20% of it.
A raise is often called a round. Investors in the same round come in on the same terms, and one of them, the lead, usually negotiates those terms for everybody else. The deal starts life as a term sheet, a short summary of the price and the main rights. Once that’s agreed, the lawyers turn it into a subscription agreement, a shareholders’ agreement and usually new articles of association, the company’s rulebook, and the shares are issued and recorded on the company’s register.
Some businesses are too early to value with any confidence. There’s no revenue yet, no track record and nothing comparable to measure against, so any number the founder and investor agree on is close to a guess.
For those, there are instruments that let the money go in now and turn into shares later, at the next round where a price is set and there’s more to base it on. The early investor is rewarded for going first, usually with a valuation cap, the highest company valuation their money can convert at, or a discount on the price the next investors pay.
The best known is the SAFE, a simple agreement for future equity, which Y Combinator created in 2013. Convertible notes do a similar job but start life as a loan. In the UK, the advance subscription agreement is used in a similar way to a SAFE.
Who Buys Shares in a Private Company
Every equity investor is buying the same thing, a slice of the business that they can only turn back into cash when it’s sold, when someone buys their shares or when the company pays dividends. They are buying the chance of future upside. What usually differs between investors is how long they’ll wait and what they want alongside the shares.
| Investor | Usually backs | What they tend to want besides the shares |
| Friends and family | The very first round | To back someone they know, usually with no special terms |
| Angels | Early businesses in a sector they know | To add value in a sector they understand, often by mentoring the founder |
| Angel syndicates | Early rounds too big for one angel | The lead angel does the work and mentors the founder; the others want to follow an experienced investor |
| Venture capital funds | Businesses that could become very large, very fast | Preference shares, a board seat, consent rights and an exit inside the fund’s life |
| Private equity | Established, profitable businesses | To grow the business and sell their stake for substantially more, typically within a few years |
| Corporate investors | Businesses useful to their own strategy | A strategic benefit for their own business, such as a new product, market or customer base |
| Family offices | Sectors the family already knows, often the one it made its money in | Returns in a sector the family understands, on terms they set, as debt or equity |
| The crowd, via a platform | Consumer-facing businesses with a following | A small stake in a brand they like, with no individual say |
A venture fund has to return several times what it raised within a fixed life. It expects many of its investments to be written off, and that’s acceptable as long as a few return 100 times or more. So a fund only backs businesses that could become enormous.
A business that won’t become enormous is more likely to raise from angel investors, who approach risk very differently from venture capitalists. Angels want good returns too, but they may care more about protecting their money. An angel might take the occasional long-shot bet, but more often they’re happy with a smaller multiple from a business they can see and understand, where they don’t expect to lose everything.
Private equity isn’t automatically a takeover. Many private equity deals are minority investments where the founder keeps the biggest holding and runs the business much as before.
What Raising Equity Costs
The real cost of equity financing is the cost of raising it. Lawyers draw up the term sheet, the subscription agreement and the shareholders’ agreement, and accountants prepare the figures investors ask to see. An adviser or broker who finds the investors charges a monthly retainer, a success fee of a percentage of the amount raised, or both. A crowdfunding platform takes a percentage of what’s raised plus its own fees. And the founder’s time goes into the raise instead of into running the business.
The share the investor takes isn’t a cost in the same way, because there’s nothing to measure it against. Without the money, the business wouldn’t become what it becomes with it.
Say a founder raises £500,000 at a £2m pre-money valuation. The investor owns 20% and the founder keeps 80%. If the business is later sold for £6m, the founder’s 80% is worth £4.8m and the investor’s 20% is worth £1.2m, plus any dividends paid along the way.
If the business fails, the investor loses their £500,000 and the founder owes them nothing.
The founder’s percentage also falls if the business raises again, because each new round issues more shares. That’s called dilution, and it isn’t bad in itself. Owning 10% of a business worth £50m is worth £5m, which is more than owning 80% of a business worth £3m, at £2.4m.
What Investors Get Besides Their Shares
A minority shareholding on its own gives an investor very little say over the business and little protection for the money they’ve put in. So investors putting in significant sums often want rights on top of their shares, written into the shareholders’ agreement and the company’s articles.
What they ask for depends on the investor and the size of the cheque. An angel with a small stake may want little beyond the shares themselves. A venture capital or private equity fund leading a round usually wants more, and those terms can often include things like:
A board seat. An investor with a seat is in the room for every significant decision, not just the ones the founder chooses to share.
Consent rights. A list of things the company can’t do without the investor’s agreement, such as hiring above a set salary, taking on debt, selling assets or paying dividends.
Preference. In deals led by venture capital funds, the investor is often paid back first when the business is sold. This is called a liquidation preference. On a modest sale it can leave the founder with far less than their percentage suggested.
Drag along. Buyers usually want 100% of a company, so if enough shareholders vote to sell, the rest can be made to sell too. It stops a small holder blocking a sale.
Exit timing. A venture or private equity fund has a fixed life and needs its money back inside it. That can clash with a founder who plans to run the business for another 20 years, so it can be agreed in the term sheet.
Equity Financing Rules by Country
The mechanics of selling shares are much the same everywhere. The tax breaks for investors and the rules on who can be offered shares change from country to country. Promoting a share offer to the public is regulated almost everywhere.
In the UK, the Seed Enterprise Investment Scheme gives investors income tax relief for backing young companies. A company can raise up to £250,000 through SEIS if it has gross assets under £350,000 and fewer than 25 full-time employees, with the larger Enterprise Investment Scheme above that.
Australia’s equivalent is the early stage innovation company regime. Investors in a qualifying company get a 20% non-refundable tax offset, capped at A$200,000 a year, and gains on shares held for between 12 months and 10 years can be disregarded for capital gains tax.
In Singapore, the government’s Startup SG Equity scheme co-invests with independent third-party investors in eligible technology startups, and Budget 2026 set aside another S$1bn for it.
In the UAE, the Dubai Financial Services Authority launched a crowdfunding framework in 2017 covering platforms where investors buy into businesses, the first of its kind in the Gulf.
In the US, a company can raise up to $5m in 12 months through Regulation Crowdfunding, and it has to go through an SEC-registered intermediary.
FAQs
Do you have to pay back equity financing?
No. Unlike a loan, there’s nothing to repay. Equity investors own shares, and they get their money out when the business is sold, when someone buys their shares or through dividends. There’s also no early repayment that ends the relationship, the way paying off a loan does. An investor stays a shareholder until they sell their shares, and unless the articles or shareholders’ agreement say otherwise, they only sell if they want to.
How much of my business should I give an investor?
It follows from the amount being raised and the valuation the founder can justify. Raising more than the plan needs means selling more of the company than necessary, and that can’t be undone without buying the shares back.
Can a business that isn’t a tech startup raise equity?
Yes, absolutely. A business in any sector can raise equity. What changes is which investors will be interested, and that depends on the sector, the stage the business is at and how fast it can grow.
Venture capital looks for businesses that could become very large very quickly, which is why it’s so closely linked with tech. A profitable manufacturer or services firm is more likely to raise from angels who know its sector, from a family office or, once it’s established, from private equity. Consumer brands with a loyal following can also raise from their own customers through crowdfunding platforms.
Do equity investors get a say in how the business is run?
It depends on how much they own and what the shareholders’ agreement says. An angel with a small stake usually has no formal say beyond the rights every shareholder has. A venture fund leading a round often takes a board seat and consent rights over major decisions. A private equity firm buying a majority can take control.
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