What Are the Pros and Cons of Offering Equity to Investors?

 Posted on September 26, 2024 in Landlord-Tenant Dispute

Securing financing is usually the biggest challenge for startups. New entrepreneurs often find themselves in a race against time, trying to obtain funding for operations, payroll, and product development before they come to a halt. Startup owners may use a number of methods to raise capital such as crowdfunding, bootstrapping from friends and family, and loans.

One of the most popular ways startups obtain financing is from investors such as venture capital firms. When investors put their money into a startup, they often want equity in exchange. Equity means the investor receives a share of the company. Depending on the investment, an investor’s equity can be quite large. This could give the investor influence in the company’s decisions.

Offering equity to investors has advantages, but it also has its drawbacks. In this article, we will explore the pros and cons of investor equity, as well as how to contact an Illinois corporate law attorney for legal guidance and protection.

What Are the Pros of Offering Equity to Investors in a Startup?

 Offering investors equity in your startup can have the following advantages:

• Financing: The most obvious upside to offering investor equity is receiving capital without debt, which you would have if you secured financing through some other methods.

• Guidance: Startup investors, especially venture capital firms, are usually experienced in getting companies off the ground. In many cases, investors are more experienced entrepreneurs than the startup’s management. Because they have equity in the business, investors may have an interest in offering guidance.

• Connections: Investors and venture capitalists often have connections in the industry that may be helpful for a startup. Once they have equity in the company, they will likely be incentivized to use those connections to help the business grow.

What Are the Cons of Offering Equity to Investors in a Startup?

While it has its benefits, investor equity can also have significant drawbacks:

• Loss of control: Depending on how you negotiate the deal, an investor may have a certain degree of control over your company. This could mean having a seat on the board or having a vote in the company’s decisions.

• Dilution of ownership: Every time you offer an investor equity, you are not only diluting your own ownership in the company but you now have fewer shares to offer investors in the next round of funding.

• Pressure: Once they have a share of the company, many investors place the company’s management under heavy pressure to show growth within a short period. This can strain the company’s resources and ultimately be counterproductive.

Unfortunately, these drawbacks are often ignored by entrepreneurs who are desperate to secure funding now and decide to worry about the consequences later.

Contact a DuPage County, IL Business Law Attorney

Whichever path to financing you choose, you should be guided by a Naperville, IL startup lawyer. Raising capital can have long-term effects on you and your business. At Lindell & Tessitore, P.C., our extensive experience in corporate law allows us to protect our clients’ interests and we are ready to use our legal services to your advantage. Speak with a skilled lawyer today by calling 630-778-3818 now.