The Basics of Equity Capital

Equity financing can come from various sources, including venture capital firms and private investors.

Whichever source you choose, there are some basics you should understand before you try to get equity capital. An investor's "share in your company" comes in various forms. If your company is incorporated, the investor might bargain for shares of stock. Or an investor who wants to be involved in the management of the company could come in as a partner.

Keeping control of your company can be more difficult when you are working with outside investors who provide equity financing. Before seeking outside investment, make the most of your own resources to build the company. "The more value you can add before you go to the well, the better," says John R. Throne, a professor of entrepreneurship. If all you bring to the table is a good idea and some talent, an investor may not be willing to provide a large chunk of capital without receiving a controlling share of the ownership in return. As a result, you could end up losing control of the business your started. "The more of your own money you can put in," Throne says, "the more likely you are to exercise control."

Excerpted from Start Your Own Business: The Only Start-Up Guide You'll Ever Need