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 shouldunderstand before you try to get equity capital. An investor's"share in your company" comes in various forms. If yourcompany is incorporated, the investor might bargain for shares ofstock. Or an investor who wants to be involved in the management ofthe company could come in as a partner.

Keeping control of your company can be more difficult when youare working with outside investors who provide equity financing.Before seeking outside investment, make the most of your ownresources to build the company. "The more value you can addbefore you go to the well, the better," says John R. Throne, aprofessor of entrepreneurship. If all you bring to the table is agood idea and some talent, an investor may not be willing toprovide a large chunk of capital without receiving a controllingshare of the ownership in return. As a result, you could end uplosing control of the business your started. "The more of yourown money you can put in," Throne says, "the more likelyyou are to exercise control."

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

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