What Is an Equity Raise and How Does the Process Work?

Equity represents ownership in a company. An equity raise is a process where a company sells ownership stakes to investors in exchange for capital. This financial activity allows businesses to secure funding for various strategic objectives.

Defining an Equity Raise

An equity raise involves a company selling shares of ownership to investors, providing the company with capital. This method of financing contrasts with debt financing, as the funds raised through equity do not require repayment, easing the burden of interest payments. Companies undertake equity raises for several reasons, including funding future growth and expansion initiatives. This capital can support projects, such as research and development, or facilitate the expansion of operations into new markets.

Another objective for an equity raise is to strengthen a company’s financial position by reducing existing debt. Companies may also pursue equity financing to fund mergers and acquisitions, expanding their market share or consolidating operations. By exchanging ownership for money, businesses aim to achieve specific goals that support their long-term viability and development.

Common Approaches to Equity Raising

Companies have various avenues to pursue an equity raise, from private arrangements to public market offerings. Private placements involve selling shares directly to a limited group of investors without a public offering. These are conducted under specific Securities and Exchange Commission (SEC) rules, such as Regulation D, which exempts companies from full registration requirements. Regulation D offerings target accredited investors, defined by income or net worth thresholds, though some rules permit a limited number of non-accredited investors.

Venture capital provides funding from firms specializing in high-growth startups, in exchange for an ownership stake and sometimes an active role in the company’s development. Venture capital investments occur in stages, such as pre-seed, seed, Series A, B, and C rounds, corresponding to different levels of company maturity and capital needs. Angel investors are wealthy individuals who invest their personal funds in early-stage companies, providing capital, mentorship, and industry connections. These investors seek an equity stake in early rounds.

Crowdfunding allows companies to raise smaller amounts of capital from a large number of individuals, facilitated through online platforms. The Jumpstart Our Business Startups (JOBS) Act enabled private companies to sell securities to a broader public, including non-accredited investors, under specific regulations. Public offerings, such as an Initial Public Offering (IPO), involve selling shares to the general public for the first time, marking a company’s transition from private to public ownership. For already public companies, secondary offerings can involve the sale of additional shares by the company to raise more capital, or the sale of existing shares by large shareholders. A dilutive secondary offering creates new shares, increasing the total outstanding shares and potentially affecting existing shareholders’ ownership percentages.

Navigating the Equity Raise Process

The process of conducting an equity raise follows a structured sequence of steps. The initial phase involves thorough preparation, where a company develops a detailed business plan outlining its strategy, market opportunity, and operational framework. This preparation also includes creating comprehensive financial projections, which forecast future revenues, expenses, and profitability. Determining the amount of capital needed and how it will be utilized is a fundamental aspect of this preparatory stage.

Following preparation, a company undertakes a valuation to determine its worth for setting a fair share price for investors. Valuation methods involve analyzing comparable companies or projecting discounted cash flows. Once a valuation is established, the company identifies and approaches potential investors who align with its capital needs and long-term vision. This outreach can involve networking, seeking introductions, or engaging financial advisors.

Due diligence is a step where potential investors review the company’s financials, operations, legal standing, and overall business health. Simultaneously, the company may conduct its own due diligence on investors to ensure their legitimacy and alignment. Issues discovered during due diligence can sometimes cause deals to fall through, highlighting the importance of thorough preparation. Subsequent negotiations involve the specific terms of the investment, including the share price, the number of shares to be issued, and any rights granted to investors. The final stage is the closing of the deal, where all parties sign definitive agreements and the capital is transferred in exchange for the ownership shares.

Understanding Key Roles in an Equity Raise

Several parties participate in an equity raise. The company seeking capital is the central entity, responsible for presenting its vision, financial health, and growth potential to attract investment. It manages the internal preparation, presents to potential investors, and issues the equity.

Investors are individuals or entities providing capital in exchange for an ownership stake in the company. These can range from individual angel investors to institutional venture capital firms or public market participants. Their role involves assessing the investment opportunity, conducting due diligence, and negotiating terms.

Investment banks play an advisory and facilitative role, particularly for larger or public offerings. They assist companies in structuring the raise, valuing the business, identifying potential investors, and managing the offering process, including underwriting securities. Legal counsel ensures that all aspects of the equity raise comply with relevant securities laws and regulations. Attorneys draft and review all legal documentation, including offering memoranda, subscription agreements, and shareholder agreements.

Accountants provide expertise in financial reporting and due diligence. They assist the company in preparing accurate financial statements and projections required for investors’ review. Accountants also help verify financial data during the due diligence phase.