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Equity Financing Examples: The Definitive Guide

Avadhut
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Updated on: March 27, 2020

Huge paychecks from IPOs are real.

That’s why lots of investment banking aspirants are looking at Equity Financing Examples as the home of their upcoming career.

Perhaps, that’s the same reason why you’re here.

Or, maybe you’re just curious about what kind of jobs one should expect in the capital markets division.

Either way, I'm going to present here the entire necessary introductory information for all investment banking aspirants who wants equity capital markets.

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Equity Financing vs Debt Financing

There are a lot of arguments as to whether equity or debt financing is a better one for a company. This dilemma is discussed during early negotiations between the bank and the client. But, overall, the following infographic greatly summarizes the advantages of each type of financing.

Equity Financing v/s Debt Financing

Sources of Equity Financing

One of the tasks of an Equity Market professional is to create pitching materials. That’s why it’s important to know the different sources of equity financing.

You need to know your target audience in order for you to create a customized marketing presentation.

sources of equity financing

1. Institutional and Corporate Investors

What is equity in finance? One of the biggest sources of equity financing are corporations that have excess cash. We’re not just talking here

We’re not just talking here about common private corporations, but, institutional investors as well. Institutional investors

Institutional investors include all companies like mutual funds, insurance companies, foundations, and similar companies. They invest in a company through Initial Public Offering or through secondary markets.

2. Private Individuals

Just like institutional and corporate investors, private individuals participate in equity financing through IPOs and secondary markets.

However, normally, only high net-worth individuals are the ones who participate in IPOs. Other individuals do it through the secondary markets because of the lower investment value required.

3. Venture Capitalists

Venture Capitalists could either be persons or corporations.

These capitalists are entities that actively seek promising start-ups, invest in their companies through equity financing, with the anticipation that the company will grow multiple times, together with their invested funds.

Popular venture capitalists include Bill Gurley from Benchmark, Chris Sacca from Lowercase Capital and Jeffrey Jordan from Andreessen Horowitz.

If you are familiar with the TV show Shark Tank, then, you already have a good overview of how venture capital works.

4. Angel Investors

Angel investors are called angels because they help companies that are in distress. Despite the huge risks involves in this type of investment, they are still brave (or smart) enough to proceed. Many times, angel investors are personally known by the owners of the company.

Since there’s a huge risk included, angel investors then take very active participation in the management of the business.

5. From the company itself

Equity financing can also come from the company itself. For example, currently, loaned funds can be negotiated and converted into equity securities. Or out of Retained earnings can be declared stock dividends of the stocks of the own company.

Advantages and Disadvantages of Equity Financing

Pros of equity financing

First, the company doesn’t have the obligation to pay returns every year. Especially when the company is failing or that the company is still new, it is very helpful if it is not paying any returns every year.

Having more equity investors means that more people can help in growing the company. By putting their money on the line, they will do everything in order that they can get a return on their business. Companies can tap on their Rolodex to locate suppliers, clients or other relevant individuals that can help the company.

Higher equity financing means that higher equity to debt ratio. Typically, the higher this ratio, the more attractive is the balance sheet of a company. This could result in better credit standings, and consequently, a better reputation for the company.

Cons of Equity Financing

The company will have to share the ownership with more people. It means that decisions will have to be approved by more people. The original owners or management will have less freedom as to where they want to bring the company.

The rate of return that will be expected by the investors could be higher than interest rates on debts. If the returns could not be met, it is possible that the investors would pull out their funds.

Types of Equity Financing

You must learn that there are different ways to raise money under different business scenarios.

For companies in their early growth stage, they usually do a Series A financing. Series A financing takes the form of preferred shares, which are usually convertible to common equity shares. If the company is still growing, the company could raise Series B, Series C and so on.

Mezzanine financing is one of the types of equity finance, however, it is a hybrid of debt and equity securities. Mezzanine is the ones being paid after senior liabilities are paid in case of liquidation.

M&A financing, on the other hand, is the issuance of equity shares between two companies that are subjects of mergers or acquisitions.

Seed financing is the term used for financing start-up companies. Late-stage financing, on the other hand, is the term coined for equity financing of an already mature business.

What Kind of Skills Do You Need in Equity Financing

Skills needed in Equity financing

Roles in the equities markets rely heavily on research, so expect that even at the start of your career, you will be tasked to do lots of detailed researches on the historical movements of stocks or shares offerings.

Related to this, you will need to be very competent in analyzing financial figures and economic signals.

After research, you will, of course, need to present. But, your seniors or colleagues would most likely don’t have much time.

As such, you need to have the ability to choose only the important figures that you need to present. The presentation need not complete, it only has to have all the details that are necessary for informed decision making.

Presenting also comes from communicating.

You will need to project a professional and authoritative tone in your verbal and writing communications.

Also, you will need to learn technical jargon that is being used in the investment banking industry.

Lastly, shares markets are fast, you need to be as well. You need to have the ability to analyze and act quickly on market developments as they arise.

Equity Financing Examples

In order to familiarize yourself with the world of equity financing, here are some real-life business situations that you can study on:

1. Facebook’s IPO:

https://techcrunch.com/2012/05/03/facebook-roadshow-video/

2. Snapchat’s IPO:

https://www.bsic.it/wp-content/uploads/2017/03/Snap_IPO_vf.pdf

3. Fitbit’s IPO:

https://www.mayerbrown.com/files/News/32952ee2-0f6f-4527-947c-d226f8cadaee/Presentation/NewsAttachment/42bbd2fc-c31c-497d-b0b3-047dd842d55e/Fitbit%27sIPOIsAnExerciseInDisclosingDataRisks.pdf

4. IPO of Alibaba:

https://www.law.harvard.edu/programs/corp_gov/MediaMentions/09-18-14_Time.pdf

IPO Reports:

https://www.pwc.com/ee/et/publications/pub/global-technology-ipo-review-full-year-and-q4-2016.pdf

Where do You go Next?

Entering the field of equity investment banking is not a walk in the park.

You need to know the suitable finance course for you, the appropriate finance job hunting methods, and the right investment banking job.

But, don’t worry FinanceWalk can help you every step of the way. Even if you choose to start an investment banking career in debt financing, no problem!

Got questions? Let us know through your comments below!

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Ashwin
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Ashwin

My name is ashwin, I have a serious interest in this equity analyst profile, presently i am pursuing CFA level 1 and as I know about this profile I Need to have a strong analytical and written Abilities to work so how can I improve them and I am a fresher so want to be fully prepared for the job market.please help me with this.

Ramesh
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Ramesh

Very nice post. it's Really helpful

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