It’s one thing to believe in private investing and tout it as a viable and profitable investment alternative. It’s another thing to engage in specific practices that allow for its successful implementation. In order to do private investing well, there are certain things you need to do well, and that certainly rings true in the area of equity financing.
Of course, equity financing involves investors essentially taking equity/ownership of a venture or company in exchange for investment dollars. As with most investment transactions, both sides of the equation can benefit from equity financing.
The advantages of ownership
On the one hand, companies and ventures are not required to give cash back on a schedule, as would be the case with debt financing or loans. This frees up the company or venture to keep the cash within the company or venture. This is specifically ideal for companies or ventures that are growing and need the cash to do just that.
On the other hand, regarding equity financing, investors get the benefit of ownership. This means that they can have a say in the running of the company or venture, especially if it falls within their area of expertise. It also means that equity investors receive a share of the profits — when they happen.
These are the reasons why equity financing frees up cash for the company or venture, while any financial returns often come at a later date. Yet there are some considerations investors in equity financing should make when considering investment options.
Know what you’re investing in
First, any investor should get a firm assessment of a company or venture’s financial numbers. As much as this may seem obvious, with private investing, financial disclosure isn’t as regulated as it is in the public markets, which means you have to do you due diligence: What are the company’s working capital, fixed costs and marketing needs? What are the company’s financial objectives, and do they fit with your own investment objectives?
Second, just where do you fit in with the company or venture. How much control of the company do you want? What do you think of the management that’s currently in place? What say will you have in any future management changes, if any are needed.
These are the kinds of considerations investors should engage in when they decide to put their own money into the ownership of an investment opportunity. After all, it is your money. Make sure you invest it wisely.
ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.