Equity is a long-term source of finance available to companies. This method of finance leads to dilution of ownership as fully subscribed and paid shares signify that there are part owners of the company in proportion to their shareholding. Yes, it is true that the founder/founders of the company may own the majority of the shares and still be called the owner/owners of the company, but it is also imminent that other shareholders have certain rights. The right to vote at the annual general meeting, right to dividends, right to attend the annual general meeting, right to company information, etc., all these pertain to publicly listed companies. For privately owned companies or limited liability companies and partnerships, equity holders may even be actively involved in managing the company. So before deciding whether or not to be financed with equity, certain factors should be considered. In this article, the focus would be ongoing public to attract equity financing and on publicly listed companies.
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Is Equity financing for you?
The following factors should be considered:
The size of the company
How big is the company? This is a very important factor to consider because it would be unwise for a small company to decide to go public. The costs may be too much, and investors may not be interested.
Costs of raising equity finance
Before a company can raise equity finance especially from the stock market, there are several costs that would be incurred such as, transaction costs, legal costs, etc. If the company can effortlessly handle such costs, then it can decide to go public and raise equity finance.
No more Privacy
There are certain rules and restrictions that apply to publicly listed companies. One of them is publishing periodic financial statements. This means that all the company’s financial statements must be available to anybody anywhere at any time at no cost. If you decide you don’t mind sharing such information, then perhaps, equity financing is for you.
Dilution of ownership
Equity financing further reduces your proportion of ownership and even makes it possible for a takeover to occur in future.
Rights of ownership
Shareholders have certain rights, and all of these rights should be considered. With equity financing, you have to be always prepared to make decisions that are favorable to shareholders and also strive to ensure the company continuously performs very well so that share prices would remain favorable and new investors would also be attracted to the firm.
Less risky nature of equity financing
Unlike raising finance through debts which turns out to be more expensive with possible high-interest rates and the possibility of going bankrupt if debts are not repaid, it is a much safer and less risky method of raising funds. Although equity shareholders have a right to earn dividends, they may decide to plow back profits to the company if need be instead of declaring dividends.
In summary, any company with promising future prospects and whose owner or founder lacks creditworthiness can decide to consider equity financing. All that is needed is available investors to provide the necessary funds and efficient management.
In next story, we will talk about: WHAT DOES A NEGATIVE DEBT TO EQUITY RATIO MEAN FOR A COMPANY?