A flourishing equity finance industry is crucial for economic development. Thanks to globalisation and digitisation, Irish companies have attracted record funding in the last 18 months.
Raised capital helps businesses position themselves strongly on a global scale, create world-class companies, and strengthen the Irish ecosystem.
Table of Content
In Ireland, several companies are raising equity finance, which is used in the growth, product differentiation, and competitiveness of companies.
Key takeaways
- Equity finance means raising capital by selling shares of the company.
- Equity finance has advantages like no repayment obligation, access to valuable expertise, and shared risk.
- Angel investors, venture capital, private equity, and public offerings are sources to raise equity.
- Companies issue equity to access large amounts of capital without increasing debt.
What is equity finance?
Equity finance is financing that requires selling business shares to raise capital. It assists in finding capital from outside investors. In return, share buyers get a stake in the business organisation.
In debt financing, funds are raised as a loan, and the money and the agreed interest are paid back. In contrast, in equity financing, the money is raised as the sale of securities, and no repayment is made. This way, investors get stock in the company and some percentage of its future income.
Advantages of Equity Financing
- No Repayment Obligation: Unlike with loans, where businesspersons are expected to pay back the amount borrowed or pay for the capital cost, equity financing does not call for such payments. It can help relieve some of the pain of cash highs and lows and let companies reinvest their profits into growth.
- Shared Risk: One advantage of using investors is sharing the business risk; this may prove handy in start-ups and high-risk business undertakings.
- Access to Expertise: Venture capital investors may have specific knowledge of the industry and the outlets, clients, and other means that can benefit the company.
- Large Capital Amounts: Equity financing allows raising large capital amounts, sometimes more than what loans can provide.
Types of Equity Financing
- Angel Investors: Because they have been involved in the sector, angel investors can make large investments and provide assistance, referrals, and knowledge. Angel funding usually occurs during the early stages of a company’s development cycle.
- Venture Capital: Venture capitalists are people who invest in promising organisations that can offer competitive advantages and reasonable returns.
- Crowdfunding: In crowdfunding, many people contribute a small sum of money over the Internet to a business entity to fulfil some financial target. These investors’ considerations are often similar to the vision concerning the goals and purposes of the business enterprise.
- IPO: An established firm can generate capital by going public with its stock’s initial public offerings (IPOs). Owing to the cost, duration, and labour involved in IPOs, this kind of equity funding takes place later in the business’s growth. Compared to angel and venture capitalists, IPO investors demand less control.
Equity Financing Examples
- Stripe: Irish entrepreneurs Patrick and John Collision founded Stripe, a global technological firm that has embraced equity financing. The capital is collected with equity funding by attracting venture capital investors.
- Teamwork: Teamwork is an Irish software firm that offers project management products and services and has introduced new products to the market with the help of venture capital.
- CarTrawler: This Ireland-based technology firm has raised private equity capital to refashion its renting-a-car and mobility services software, expand the business, and incorporate new services.
Why Do Companies Use Equity Financing?
- Equity financing helps to get the required funds for the expansion of the operations, penetration into new markets, or new product development without putting pressure on the organisation’s debt.
- Companies can also expand by selling shares since they can bring in more capital that can be reinvested into the business from the retained profits.
- It is especially beneficial for businesses in risky or unstable sectors, as the financial risk will be shared with the investors.
- Venture capitalists also contribute more than just cash to the businesses they invest in. Their expertise in industry knowledge, contacts, and consulting could greatly help the firm’s development plan.
How Important is Equity in a Company?
- Ownership and Control
Equity is the ownership of an organisation and an asset. The distribution of equity defines control and authority in the business, particularly the decisions that are made.
- Attracting Talent
Using stock incentives in the employee compensation policy may help attract and retain talented workers. People with some ownership interest in the company are always more loyal and driven towards the company’s profitability.
- Valuation and Credibility
Equity investments can help improve a company’s worth and reputation. Having famous investors or successful IPOs may enhance a company’s market value or status.
- Financial Flexibility
Equity is a great source of financing because it ensures financial safety and freedom, allowing firms to adapt to unfavourable conditions and focus on value creation.
Equity Financing vs. Debt Financing
- Ownership Dilution: One disadvantage of equity financing is that it involves selling equity, which results in a dilution of existing owners’ control of the business. However, debt financing does not change the ownership structure from its current state.
- Cost: Equity financing is cheap because it does not have to be paid back, but it is expensive if the business becomes very profitable because the investors have claims on the business profits.
- Control and Decision-Making: Equity investors, in particular, want to have a say on matters affecting the business and its operations because they own part of the company. Debt financiers usually have little influence, provided that the payments are made.
Conclusion
Equity financing is thus a crucial weapon in the arsenal of companies in Ireland that wish to seek capital funding, expand, and perform optimally in the current business world. Awareness of the different categories of equity financing and the benefits unique to each type allows companies to choose their financing models effectively.
Hire an expert accountant from Experlu, who will be your most trusted business adviser. With their vast knowledge of Irish tax structure and legal compliance, these experts can help choose the most suitable funding option for your business, evaluating what each option offers, the processes involved, and what potential investors will expect as a return.