Equity finance is investment in your business in return for a share of the business and a share of the profits. Equity can come from the owners of the business, or outside individuals, companies or investment bodies. It includes business angels, other informal investors and venture capital.
There are very generous tax breaks for investors to encourage business growth with this kind of investment through the Government’s Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
An equity investor becomes a partner in your business. Your business’s success is also their success, so they will generally do what they can to help it to get there. For them it’s a risky investment where success is by no means guaranteed. As a result, formal investors will be looking for a good return on their investment and for you to have an ‘exit strategy’ so that they can access that return reasonably quickly, through sale or floatation on the stock market.
Friends and family
There is thought to be a huge amount of informal investment provided by family, friends, work colleagues or others. Informal investors could and should take advantage of the very generous tax breaks available through the SEIS and EIS. This finance may be more or less structured like a loan or an equity investment and be related to a share in profits, often with delayed payments.
Angel investors are generally wealthy people who provide small investments for start-up or growing businesses. In return they usually receive equity – a percentage of the ownership of the business.
A study by NESTA in 2009 found that the average investment was £42,000 and the average equity stake was 8%. There’s no ‘set amount’ for angel investment which can be as small as £5,000 and go up to several million pounds. Angel investors will be looking for a good return on their investment and they are generally looking for an exit, or sale of their shares, within 5 years.
Most business angel relationships are sourced by the business seeking investment through their own networks. There are also several Business Angel Networks that help to match-make businesses with potential investors. Those networks also enable angel investors to share research efforts and pool capital.
National trade association dedicated to promoting angel investing and supporting early stage investment in the UK.
Venture capital (VC) is generally aimed at early stage companies with high-growth potential. Investable companies need to have a novel or disruptive idea or business model which has the potential to become highly profitable. VC investment is high-risk, most investments fail. As a result VC funders are quite hands-on, taking a significant role in decision-making as well as their portion of ownership and value.
The leading industry body and public policy advocate for the private equity and venture capital industry in the UK.
Leading group of business angel investors in Norfolk and Suffolk, established to support spinouts, new ventures and growth businesses, boasting expertise in food and agri/biotech, specialist engineering and energy.
Venture capital fund providing equity finance for SMEs based in the East of England.