Startup Equity Financing

In equity financing, the startup offers investors a chunk of ownership in the startup in exchange for funds. The investor is paying to own a part of the startup, which means that he also owns a share of the profits when the time comes. 

Think of it equity financing this way: The startup is a piece of farmland and needs money to buy seeds and farming equipment. In exchange for money, it offers an investor a small portion of the land and during the harvest, the investor gets whatever was planted on his portion of the land. 

Startups can sell as much of their equity as they want to. 

In equity financing, there’s no obligation for the startup to pay investors back because it’s technically a trade, and the investors are buying ownership. Thus, if the startup fails or makes no profit, the investors get nothing.

Startups can also buy back the ownership shares from the investor and this is called repurchasing or the repurchase option. Investors can also resell their shares to other investors which is one of the ways investors can exit a startup. 

Startups can also sell the rest of their equity shares to investors and this is called an exit. In an exit, the startup’s founders are basically selling their shares or ownership stakes in the company to other investors or companies who then acquire the startup.