when deciding whether to seek debt or equity financing companies usually consider these three factors 
if a company has given investors a percentage of their company through the sale of equity the only way to remove them and their stake in the business is to repurchase their shares a process called a buy out however repurchasing the shares will likely cost more than you received when you issued them reasons to choose equity financingbusinesses in their early stages can be of particular interest to angel investors and venture capitalists that s because of the high return potential they may see due to their experience and skills equity financing is a solution when established financing methods aren t available due to the nature of the business for example traditional lenders such as banks often won t extend loans to companies they consider too significant a risk because of an owner s lack of business experience or an unproven business concept with equity financing you don t add to your existing debt load and don t have a payment obligation investors assume the risk of investment loss equity financing delivers more than money depending on the source of the funds you may also receive and benefit from the valuable resources guidance skills and experience of investors who want you to succeed equity financing can raise the substantial capital you may need to promote rapid and greater growth making your company attractive to buyers and a sale possible pros and cons of equity financingwhile equity financing has benefits there are some disadvantages to being funded this way no obligation to repay the moneyno additional financial burden on the companylarge investors can provide a wealth of business expertise resources guidance and contactsyou have to give investors an ownership percentage of your companyyou have to share your profits with investorsyou give up some control over your companyit may be more expensive than borrowingequity financing results in no debt that must be repaid it s also an option if your business can t obtain a loan it s seen as a lower risk financing option because investors seek a return on their investment rather than the repayment of a loan plus investors typically are more interested in helping you succeed than lenders are because the rewards can be substantial equity financing offered by angel investors and venture capitalists can provide access to outstanding business expertise insight and advice it can also provide you with new and vital business contacts and networks that may lead to additional funding the stakes taken by investors providing equity financing can be significant and thus profits going to the business owners are reduced even small common stock investors get a share of the profits moreover investors may want to be consulted whenever you plan to make decisions that will impact the company in exchange for the large amounts that angel investors and venture capitalists may invest business owners must give over some percentage of ownership that can translate to having less control over your own company the typically higher rate of return demanded by large investors can easily exceed that lenders charge also shareholder dividends aren t tax deductible interest payments on loans are with some exceptions 3example of equity financingsay that you ve started a small tech company with your own capital of 1 5 million at this stage you have 100 ownership and control due to the industry that you re in and a fresh social media concept your company attracts the interest of various investors including angel investors and venture capitalists you re aware that you ll need additional funds to keep up a rapid pace of growth so you decide to consider an outside investor after meeting with a few and discussing your company s plans goals and financial needs with each you decide to accept the 500 000 offered by an angel investor who you feel brings enough expertise to the table in addition to the funding the amount is enough for this round of funding plus you don t wish to relinquish a greater percentage of your company ownership by taking a larger amount thus the total invested in your company is now 2 million 1 5 million 500 000 the angel investor owns a 25 stake 500 000 2 million and you maintain a 75 stake special considerationsthe equity financing process is governed by rules imposed by a local or national securities authority in most jurisdictions such regulation is primarily designed to protect the investing public from unscrupulous operators who may raise funds from unsuspecting investors and disappear with the financing proceeds equity financing is thus often accompanied by an offering memorandum or prospectus which contains extensive information that should help the investor make an informed decision on the merits of the financing the memorandum or prospectus will state the company s activities give information on its officers and directors discuss how the financing proceeds will be used outline the risk factors and have financial statements investor appetite for equity financing depends significantly on the state of the financial markets in general and equity markets in particular while a steady pace of equity financing indicates investor confidence a torrent of financing may indicate excessive optimism and a looming market top for example ipos by dot coms and technology companies reached record levels in the late 1990s before the tech wreck that engulfed the nasdaq from 2000 to 2002 45the pace of equity financing typically drops off sharply after a sustained market correction due to investor risk aversion during such periods 