WE ALREADY LEARNT IN LESSON 2, NAMELY THE VALUE OF THE SHARES ISSUED BY A COMPANY; AND AS YOU USUALLY WON’T ISSUE ANY SHARES FOR YOUR SMALL OR MICRO BUSINESS, YOUR BUSINESS IT SELF IS EQUITY. THAT SAID, IF SOMEBODY INTENDS TO GIVE YOU MONEY IN THE FRAME OF EQUITY FINANCING, HE OR SHE WANTS “A SHARE” IN YOUR BUSINESS. “A SHARE” IN THIS CONNECTION MEANS NOT ONLY ONE SHARE (BECAUSE YOU DON’T ISSUE ANY SHARES OF YOUR BUSINESS), BUT IT MEANS “PART” OF YOUR BUSINESS.
HOW BIG THIS PART IS MAINLY DEPENDS ON THE AMOUNT OF MONEY THE FUTURE PARTNER WANTS TO PUT INTO YOUR BUSINESS, AND OF THE KIND OF BUSINESS YOU WANT TO ESTABLISH. USUALLY IT WILL BE AROUND 25% OF IT, BUT IT SHOULD ALWAYS BE LESS THAN 50%. THAT’S BECAUSE IF IF THE PERCENTAGE IS 50 OR MORE, YOU WILL LOSE CONTROL IF YOUR BUSINESS, AND THAT IS SURELY NOT IN YOUR INTEREST.
A PERSON WHO PUTS SEED MONEY INTO A START-UP BUSINESS IS CALLED AN “ANGEL INVESTOR”. ANGEL INVESTORS ARE EITHER PROFESSIONAL INVESTORS, OR THEY ARE FOUND AMONG FAMILY AND FRIENDS. THERE ARE TWO TYPES OF SUCH INVESTORS: EITHER THOSE WHO JUST PUT MONEY TO START A BUSINESS (OR, NOT LIMITED TO A START-UP BUSINESS, INTO AN ESTABLISHED BUSINESS), OR THOSE WHO ENGAGE THEMSELVES ACTIVELY IN THE BUSINESS BY GIVING ADVICE OR EVEN RUN A SECTION OF THE BUSINESS, LIKE, E.G., MARKETING.
AN EQUITY FINANCING AGREEMENT – JUST LIKE A LOAN AGREEMENT – IS WRITTEN IN FOUR PARTS:
- IDENTIFYING THE PARTNERS TO THE AGREEMENT
WHO IS THE INVESTOR (NAME AND ADDRESS, CONTACT INFORMATION);
WHO IS THE BUSINESS OWNER (NAME AND ADDRESS, CONTACT INFORMATION);
- MAIN PART
WHAT IS THE BUSINESS TO BE INVESTED IN?
WHAT IS THE AMOUNT TO BE INVESTED?
WHAT IS THE PERCENTAGE OF THE BUSINESS TO BE GIVEN TO THE INVESTOR?
IS THE PERCENTAGE OF THE BUSINESS TO BE GIVEN TO THE INVESTOR LEGITIME AND FREE OF OBLIGATIONS (PAYABLE TAXES, ETC.);
DATE AND LOCATION OF THE ACQUISITION OF THE PERCENTAGE OF THE BUSINESS;
- ADDITIONAL TERMS
DISTRIBUTION OF LEGAL FEES;
TERMS FOR TERMINATION OF THE AGREEMENT?
ANY OTHER TERMS THE PARTIES TO THE AGREEMENT CONSIDER IMPORTANT;
- FINAL PART
SEEK LEGAL ADVICE TO FINALISE THE AGREEMENT (FEES SHOULD BE PAID BY THE INVESTOR, AS THE BUSINESS OWNER IS THE ONE WHO SEEKS FINANCIAL ASSISTANCE);
CHECK THE DRAFT OF THE AGREEMENT THOROUGHLY BEFORE SIGNING IT.
THE CHARACTERISTICS OF EQUITY FINANCING SHOW ITS ADVANTAGES AND DISADVANTAGES:
EQUITY FINANCINGIVES THE INVESTOR PART OWNERSHIP IN THE BUSINESS.
CAPITAL INVESTED IN THE BUSINESS IS PERMANENT; IT DOES NOT NEED ANY PAYBACK.
NO INTEREST MUST BE PAID ON THE CAPITAL INVESTED; HOWEVER, IF THE BUSINESS RUNS WELL, A DIVIDEND MUST BE PAID.
IN CASE OF THE BUSINESS GOING BANKRUPT, THE INVESTED CAPITAL IS THE LAST TO BE REPAID (AFTER ALL DEBTS).
AS THE INVESTOR OWNS PART OF THE BUSINESS, EQUITY FINANCING IS AT THE LONG RUN USUALLY MORE EXPENSIVE THAN DEBT FINANCING.
IF THE INVESTOR HAS EXPERIENCE IN THE BUSINESS HE OR SHE INVESTS IN, THERE CAN BE ASSISTANCE IN BUSINESS MANAGEMENT.
AS WE HAVE NOW LEARNT THE BASIC STRUCTURE OF EQUITY FINANCING, WE CAN COME TO THE QUESTIONS:
QUESTIONS
- IN YOUR OWN WORDS; WHAT IS EQUITY?
- WHAT SHOULD BE THE CONTENTS OF THE MAIN PART OF THE EQUITY FINANCING AGREEMENT?
- WHO SHOULD PAY FOR THE LEGAL FEES OF AN EQUITY FINANCING AGREEMENT, AND WHY?
- WHAT ARE THE CHARACTERISTICS OF EQUITY FINANCING?
- WHAT ARE FOR YOU THE ADVANTAGES OF EQUITY FINANCING, AND WHAT ARE ITS DISADVANTAGES?
THE NEXT LESSON WILL FOLLOW AT THE BEGINNING OF NEXT WEEK.
