Definition: Equity finance is a method of raising fresh capital by selling shares of the company to public, institutional investors, or financial institutions. The people who buy shares are referred to as shareholders of the company because they have received ownership interest in the company.
One of the most sought after methods of raising cash, apart from public issue, is via Venture Capital. Venture Capital (VC) financing is a method of raising money via high net worth individuals who are looking at diverse investment opportunities.
They provide the company with much needed capital to sustain business in exchange of shares or ownership in the company.
A start-up might need various rounds of equity financing to meet liquidity needs. They (VC) may like to go for convertible preference share as form of equity financing, and as the firm grows and reports profit consistently, it may consider going public.
If the company decides to go public, these investors (Venture Capitalists) can use the opportunity to sell their stake to institutional or retail investors at a premium. If the company needs more cash, it can go for right offer or follow on public offerings.
When a company goes for equity financing to meet its liquidity needs, for diversification or expansion purpose, it has to prepare a prospectus where financial details of the company are mentioned. The company has to also specify as to what it plans to do with the funds raised.
Equity financing is slightly different from debt financing, where funds are borrowed by the business to meet liquidity requirement. Ideally, to meet liquidity needs an organisation can raise funds via both equity as well as debt financing.