Equity financing refers to raising capital through the sale of the company’s shares and/or other securities. In technology startups, the class of shares offered to investors is typically created as part of the financing and will be tailored to the investors’ needs. When issuing shares during any stage of funding, you must comply with applicable securities laws and should seek advice from legal counsel before proceeding.
Early-stage investors tend to use common shares, convertible debentures and warrants for seed or first rounds of investing. Sophisticated later-stage private investors traditionally use other types of equity instruments.
Common share investments are the simplest form of equity financing. Shares are offered at a price per share agreed upon by the company and investors. Investors receive shares with the same voting rights and the same terms as founders and employees holding stock options.
Common share investments offer lower legal costs. This appeals to founders/management, friends and family, and angel investors, particularly when the size of the financing round is small. Founders may not appeal to outside investors seeking better upside potential on cash invested in a business.
Some investors believe that having all shareholders on an equal footing creates incentive for the company’s team to perform better. This benefit outweighs the benefits of preferred share deals that offer investors better upside potential and protection for downside risk. However, these groups are the exception rather than the rule.