Raising capital during the startup phase of a business can present challenges to an entrepreneur. Debt financing is difficult to obtain while a business is in its infancy, making equity financing common among early-stage entrepreneurs. There is no single equity financing choice that best fits all startup companies, but the most popular options include friends and family, angel investors and venture capital.

Friends and Family

It is common for business owners to make the ask for financing from close friends and family before venturing into alternative equity financing options. In return for financing some of the startup costs, individuals are given an equity stake in the company through stock offerings.

This method of raising capital is attractive to business owners because friends and family members do not expect to be paid back until the company begins to generate revenue. In addition to the extended repayment time frame, this group of investors does not typically take part in the day-to-day operations of the business. Instead, the entrepreneur maintains full control over how the company is run and how the investment is used.

Angel Investors

Angel investors offer business owners a greater amount of financing than what is available through friends or family, but these individuals or small groups require an ownership stake between 20 and 40% in the business.

This method for raising capital is advantageous to an entrepreneur; in addition to funding, angel investors lend their business expertise and management skills to the company to safeguard their equity position. These investments are also for the long term, but they require more time and preparation to secure.

Venture Capital

An investment from a venture capitalist is similar to angel investment, in that the business owner benefits from greater amounts of capital in addition to the business expertise of the venture capital individual or firm. However, because of the size of the investment, not many startups are selected to receive funding. For businesses with fast growth potential, such as those in the technology industry, venture capital is an attractive option for equity financing.

  1. What resources are available to an entrepreneur to raise capital?

    Learn how entrepreneurs can use various resources to raise capital and how each is beneficial throughout the different phases ... Read Answer >>
  2. How is venture capital different from other kinds of equity financing?

    Learn how venture capital equity financing differs from other funding options and what companies need to be aware of prior ... Read Answer >>
  3. Where does venture capital come from?

    Obtaining funding from venture capitalists is the way to go for those who have great ideas with potential for becoming lucrative ... Read Answer >>
  4. What are the benefits for a company using equity financing vs. debt financing?

    Learn what some of the principal advantages are for a company that chooses to utilize equity financing in preference to debt ... Read Answer >>
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