Selling shares in your business (equity finance)

Last updated: 16 June 2017

If you need money to grow your business, one way is to issue shares in the business and sell them to investors. This is known as 'equity finance'.

Investors may want to own shares in your business so they can:

  • share in your profits (when you pay dividends to them)
  • make money by selling the shares

Advantages of equity finance

The main advantages of equity finance are that investors:

  • don't expect repayments straight away
  • understand there is a level of uncertainty and risk
  • will give you money even when your business can't borrow from banks
  • can bring skills, experience and connections to help your business
  • have an interest in helping your business grow and become profitable

You'll also have greater freedom in how you spend their investment (in line with your business plan).

Other ways of funding your business

You might want to consider other ways of funding your business, such as:

Scottish-European Growth Co-investment Programme

The Scottish-European Growth Co-investment Programme supports businesses looking to raise £2 million or more in equity finance (selling shares) to grow their business.

It's delivered by Scottish Enterprise through the Scottish Investment Bank, in partnership with the European Investment Fund.

Find out more information on the Scottish Enterprise website.

Preparing for investment

If you're looking to attract an investor, you need to:

  • have a business plan
  • understand how to pitch your idea or business

Your investors

Who you get money from will depend on:

  • the size of your business
  • the amount of investment you need
  • how attractive your business is to particular investors

Your business could find equity investment from:

  • friends and family
  • angel investors and angel networks
  • crowd funders
  • venture capitalists
  • government funds
  • private equity funds
  • corporations
Angel investors and networks are individuals or groups who invest in businesses at an early stage of their development.

If your business is at an early stage, you might only need a small amount of money, which you could find from:

  • your friends and family
  • angel investors

If your business is larger, you might need money from:

  • bigger venture capital funds
  • private equity or large corporations (if your business is really large)

Ownership and control of your business

When you issue shares in your business, you're giving up some ownership and control.

The more shares you issue, the more of the business you'll give up.

You'll stay in control of your business if you keep more than half of the shares.

If you decide to sell more than half of your shares, you can still stay in control of your business by selling them to more than one investor.

For example – if you sold 60% of your shares to one investor and kept 40%, they would be in control.

However, if you sold 3 investors 20% each and kept 40%, you would still have control.

Any investors you sell shares to could have input into how your business is run. So it's important you find investors you feel you can work with.

Dilution, share classes and valuations

Raising equity investment for your business can be complicated. There are some technical terms you should be aware of.

Dilution

When your business issues shares it 'dilutes' (reduces) your own share in the business.

For example – if you own 100% of your business and issue another equal share to an investor, your share will be diluted to 50%.

If you go on to receive more money from another investor, both your share and the original investor's share would be diluted further.

However, the more money that's invested, the more your share could be worth.

This means you might own less of the business but what you own could be more valuable.

Share classes

Shares can be issued in different types, referred to as 'classes'.

Your business can issue as many different classes of shares as you like.

Two common classes of shares are 'ordinary' and 'preference' shares.

Ordinary shares

Standard shares are sometimes called 'ordinary' shares. Investors who own ordinary shares usually have the right to vote at shareholder meetings on things like the:

  • amount of dividends proposed
  • salary packages of board members

Preference shares

Investors who own preference shares may have more rights. For example, they may have the right to:

  • buy shares at a lower price during future fundraising
  • higher dividends

Valuation

You'll need to agree the value of your business with any potential investors.

This decides how much your ownership is diluted and how much your investor ends up owning.

For example – if an investor wants to invest £200,000 and the business is valued at £1 million, they would end up owning 20% of the business.

If it's valued at £2 million, they would only own 10%.

Advice

If you're looking to raise investment using equity finance you should get advice from:

  • a lawyer
  • an accountant
  • a corporate finance advisor (corporate financier)

They can:

  • introduce you to investors
  • help you negotiate a deal

A lawyer can also make sure terms of the investment work out well for both you and your investor.

Fees

Any advisor you use will want to be paid a fee for their work.

A corporate finance advisor might take a fee and a percentage of the successful investment.

It's important to check their contracts for fees and make sure you know exactly what you're paying.

Further help

The following organisations can offer you more help and advice with equity finance.

Scottish Investment Bank

Scottish Investment Bank are part of Scottish Enterprise. They run a financial readiness service that offers businesses advice on getting funding.

You can find more information on the Scottish Enterprise website.

LINC Scotland

LINC Scotland is the national association for angel investors in Scotland.

You can find more information on the LINC Scotland website.