Is Equity Right For Me?

Is Equity Right for My Business?

So, first things first: do you even need this guide? Is equity a good option for your business? If you have a great business concept but not enough cash to fund it, then the answer could be yes. Equity is one of the most common ways to fund a small business because, well, there aren’t too many options.

However, small business equity isn’t right for every situation. In fact, we’re a bootstrapped company and we didn’t take money from outside investors, but that doesn’t mean it’s not right for you.

It can be a tough decision to sell shares of your business to people you hardly even know — and even tougher down the road to fork over a portion of your profits to someone who did nothing but open their wallet. You could lose a bunch of control, so you need to proceed carefully.

That’s why it’s important to review all your options carefully — including begging your parents for money, hitting up the bank for a loan, and buying a lottery ticket.

If the lottery thing doesn’t pan out and Mom already gave you her savings for your last idea, it’s time to learn about the different types of equity.

The Different Types of Equity

Here are the two most common types of equity and the ones you’ll probably use:

• Equity financing is when you sell “shares” of your company to outside investors in order to finance your business. When you make money, your investors are entitled to a portion of the profits. This type of equity is best for sole proprietors who need some start up cash.
• Equity compensation is when you offer your employees a percentage of company profits as part of their compensation package, typically in exchange for a lower than average salary, or occasionally in lieu of salary completely. This type of equity is best for businesses that are in need of human capital more than physical capital. If you already have an office, a coffee maker, a copier, but need a new software developer, this might be the model for you.