Financing with Equity
|•||Is just starting up|
|•||Already carries significant amounts of debt|
|•||Needs an amount of capital substantially in excess of underlying assets|
|•||Has a poor credit history|
|•||Cannot afford to service additional debt|
|•||Plans to purchase a going business|
Shares in your company can be sold privately to one or a few select buyers or publicly through an initial public offering (IPO). However, since an IPO is very costly and generally beyond the means of most small businesses, we will not consider this a viable alternative.
Equity capital may also be raised by selling common shares to employees via an Employee Stock Option Plan (ESOP). However, ESOPs are an effective source of capital only if you have many employees. Very few small businesses have enough employees to make an ESOP a viable alternative. Later, in Chapter 16, we will discuss ESOPs as a means of refinancing your business, if it is of sufficient size.
In this chapter, we’ll take a close look at raising equity capital through three significantly different business structures: traditional