Equity investment
Equity investment means selling new shares in your company for cash.
Equity investment means selling new shares in your company for cash.
The money stays in the business for good, and in return the investor owns part of the company, takes a share of its value when it is sold, and gets a say in how it is run.
When a company borrows, it agrees to pay the money back with interest on a fixed timetable, whatever happens to trading. When it sells shares, the cash becomes part of the company’s capital. Investors are paid from dividends, or when they sell their shares, and if the business fails they lose their money alongside you. That makes equity the usual fit for a company that has to spend ahead of its revenue: building a product, hiring a team before the sales arrive, or entering a market where the payback is years away.
The price of equity is ownership. Each share you sell carries a slice of every future dividend and of the proceeds when the company is sold. A lender’s return stops when the loan is repaid. An investor’s share of the value lasts as long as they hold the shares, so in a company that grows well, equity ends up the most expensive money you raise. In a company that struggles, the investor carries the loss.
Lenders judge a company on its ability to repay from cash flow and on the security it can offer. Investors judge it on how large it could become and on the people running it. A company with steady profits and assets has more choice among lenders, and the section on business loans covers that side. A company with little revenue and a large potential market will find more interest among investors. Plenty of companies use both: shares to pay for product development, and an invoice finance facility or a term loan for stock and working capital once customers are paying.
| Selling shares | Borrowing | |
|---|---|---|
| What you give up | A share of the company and of its future value | Ownership stays with you; the company takes on a liability |
| How the money is repaid | Investors are paid from dividends or when they sell their shares | Capital and interest on a set schedule |
| Security | Investors take no charge over assets | A lender can take a charge over assets and a personal guarantee from directors |
| Control | Votes in proportion to the shares, and larger investors may ask for a board seat and a veto over major decisions | Covenants in the loan agreement, with no vote |
| If the company fails | Shareholders are paid after every creditor and can lose everything they put in | The lender claims against security and any guarantees |
| Tax | Dividends are paid out of profits after corporation tax | Interest is a business cost, normally deductible against corporation tax profits |
| Suits | Companies spending ahead of revenue with room to grow large | Companies with revenue or assets to repay from |
An investor buys shares, and the rights attached to those shares are written into your articles of association and, for any sizeable round, a shareholders’ agreement. At the simplest, the shares carry votes, a right to dividends when the directors declare them, and a share of the proceeds when the company is sold.
Investors putting in larger sums ask for more. A lead investor may want a seat on the board, monthly management accounts, and a veto over decisions such as issuing new shares, taking on large borrowing or selling the company. Venture funds may ask for preference shares that pay their money back first on a sale. Each of these is negotiable, and each one shapes how much freedom you keep.
Investors only make money when they can sell their shares, through a sale of the company, a stock market listing or a sale to a later investor. Expect every investor to ask how and when that could happen.
Private individuals investing their own money, alone or in syndicates, from the first outside round. See angel investment.
Funds that pool investors’ money into companies qualifying for the Seed Enterprise Investment Scheme or the Enterprise Investment Scheme, so each investor can claim the tax relief.
Venture capital trusts and growth equity funds, for companies with revenue that need a larger sum to expand. See growth capital.
Professional funds investing other people’s money in companies that could grow very large, from seed rounds to later rounds. See venture capital.
Wealthy families investing their own capital directly, on terms each family sets for itself. See family office investment.
Many smaller investors buying shares through an FCA-regulated platform, sometimes alongside a lead investor. See crowdfunding.
Before a company has revenue, the money comes from the founders, from people who know them, and from angels and seed funds. A company at this stage that meets the rules of the Seed Enterprise Investment Scheme can offer investors 50% income tax relief on up to £250,000 raised in total, which is a large part of why early UK rounds are built around it.
Once there are paying customers and a product that works, the field widens to angel syndicates, EIS funds, equity crowdfunding and early-stage venture funds. A company with growing revenue that needs several million pounds to expand is the territory of venture capital, venture capital trusts and growth funds. Family offices invest at any of these stages, depending on the family.
Each investor has a stated focus: a stage, a set of sectors, a region, and a range of amounts it invests. Reading an investor’s published portfolio before you approach it saves both sides time. A funding search through Swoop covers angels, seed scheme and EIS funds, venture capital trusts and growth funds, venture capital, family offices and crowdfunding, alongside loans and grants. The investor decides whether to invest and on what terms.
Equity is one route among several. A company spending on research may qualify for Innovate UK grants or borrow against an expected research and development tax credit with an R&D tax credit loan, which leaves the shareholding untouched. How much equity to give away works through the arithmetic of dilution, and getting investor ready covers the documents an investor will ask for.
Inviting people to buy shares is a financial promotion. Under section 21 of the Financial Services and Markets Act 2000, it has to be made or approved by an FCA-authorised firm unless an exemption applies, such as one for investors certified as high net worth or sophisticated. Take legal advice before you send a pitch deck beyond people you know. Crowdfunding platforms are authorised and approve the promotions they carry.
Business angels invest their own money in early-stage companies, alone or in syndicates.
Read more →A young company can raise up to £250,000 from investors who get 50% income tax relief.
Read more →A company can raise up to £10 million a year from investors who get 30% income tax relief.
Read more →HMRC says before you issue shares whether your round is likely to qualify.
Read more →Venture funds buy stakes in companies that could grow very large.
Read more →Venture capital trusts and growth funds invest in companies that already have revenue.
Read more →Family offices invest a wealthy family's own money directly in private companies.
Read more →Equity crowdfunding sells shares to many investors through a regulated platform.
Read more →The stake you sell follows from the amount you raise and the valuation you agree.
Read more →Prepare the deck, forecast, data room and cap table before the first investor meeting.
Read more →Borrow if the company can meet repayments from its cash flow and the money pays for something with a clear return, such as equipment or stock. Raise equity if the company needs to spend for a long time before it earns, or if the risk of failure is high enough that a fixed repayment schedule could sink it. Equity costs you a share of the company for good; a loan costs interest for its term and may need a personal guarantee. Some companies use both.
The stake is the amount invested divided by the value of the company after the money goes in. An investor putting £200,000 into a company valued at £800,000 beforehand owns £200,000 ÷ £1,000,000, or 20%. The valuation is negotiated, so the stake is too. How much equity to give away works through several rounds with real numbers.
Only if you agree to it. Angels putting in smaller amounts may accept regular updates and information rights. A lead investor or a venture fund will usually ask for a board seat or an observer seat as a condition of investing. The right is written into the shareholders’ agreement or the articles, along with when it ends, for example if the investor’s holding falls below a set level.
No. Equity means shares, and only a company has shares. A sole trader or partnership wanting outside investors would first incorporate a limited company and move the business into it, which has tax consequences to take advice on. For borrowing of £25,000 or less, a sole trader can look at the government’s Start Up Loans scheme or their own bank.
No. Shareholders are paid only after every creditor has been paid in full, which in an insolvency leaves them with little or nothing. That risk is the reason investors ask for a share of the upside. Investors under the Seed Enterprise Investment Scheme or EIS can set a loss, less the income tax relief they received, against their income, which softens the loss for them.
Pre-money valuation is what the company is agreed to be worth before the new cash arrives. Post-money is that figure plus the new cash. Raise £500,000 at a £2,000,000 pre-money valuation and the post-money valuation is £2,500,000, so the investor owns £500,000 ÷ £2,500,000, or 20%. Always check which of the two a term sheet means.
Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.
Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.
If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.