Giving away a chunk of your business should never be done lightly. Sourcing an equity injection from external investors essentially involves surrendering part of the ownership in exchange for the funds. Unlike debt finance, where funds are repaid regularly, equity investors are repaid as your business grows.
At best, equity investment will be viewed on both sides as a partnership with each side making tangible gains from working together. Treated in this way, it is a valid and appropriate way to take a company to the next level, perhaps because it needs significant investment in product development or perhaps in management talent. It should always have a specific purpose in mind. In no way should it be regarded as a stopgap measure to raise cash.
One of the most notable downsides of equity funding is loss of ownership and therefore overall control. This kind of funding injection is not without strings. Backers will want a say in how the business is conducted and will expect investment returns on their shares in the company. If a company goes through several rounds of equity funding, they will acquire even more backers with a stake in the company, which can make decision-making more difficult. And growing the business while looking after the needs of backers who might be very focused on that investment return element can sometimes be a stretch too far.
Equity finance is only appropriate within a specific context. Short-term funding mechanisms like invoice finance, which supply funds against unpaid invoices, are often a more appropriate way of securing income for working capital purposes while retaining control. A business that has a secure cash flow is in a better bargaining positioning with its customers and suppliers and importantly this can be achieved without diluting ownership – and control. If you want a strong cash position, that doesn’t mean you have to give up chunks of your business.