In videos one and two, we learned about two ways that
an entrepreneur can cover start-up costs and operating costs.
Bootstrapping and debt financing.
In this video, we'll discuss a third option called equity financing.
This option involves selling shares to investors.
Shares are ownership in the business.
The word equity means ownership.
First, we'll discuss what it means to sell ownership in a business.
Then, we will learn about different investors who might be interested
in buying shares or providing equity financing.
This time, let's use Cricket Flower as an example.
Imagine that an entrepreneur has started this business.
Startup costs were high because of the special supplies needed.
The entrepreneur bootstrapped or used personal savings for seed money.
The entrepreneur also used debt financing by taking out a small loan from parents.
This money helped the entrepreneur buy supplies to start selling
new products made from cricket flour in the family kitchen at home.
Now, the entrepreneur is getting lots of product orders.
The entrepreneur needs to open a new larger Cricket Flour bakery and
hire an employee.
More funds are needed to pay for this.
The entrepreneur decides to look for
an investors who are interested in owning a share of the business.
These are called equity investors.
Remember, equity means ownership.
When entrepreneurs meet with possible equity investors,
they do the same thing they do when they go to borrow money from a bank.
They present the business plan, and have an effective conversation
to persuade the investors that this business will be a success.
In this case,
they are also persuading the investors that this is a good ownership investment.
They are asking the investors to make an equity investment
by buying a share of the business.
Like debt financing, equity investments also have requirements.
Let's use an example to explain these.
Let's imagine that the entrepreneur sells an investor a forty percent share
in the company for a ten thousand dollar investment.
What does this mean?
First, the entrepreneur gets ten thousand dollars to help
cover the costs of opening the new bakery and hiring the new employee.
Unlike a loan, this money does not need to be repaid.
Why?
Unlike debt financing, the investor will not get interest for this investment.
Instead the investor is now an owner, along with the entrepreneur.
The investor will get forty percent of the businesses future profits.
The entrepreneur will get sixty percent.
Also, as a part owner the investor gets some control of the business.
For example, the investor will have a say in decisions that affect the business.
These decisions might be about how to grow the business, or
even, whether to sell the business.
If the business is sold,
the investor will receive forty percent of the profits from selling the company.
For example, if the business sells for one hundred thousand dollars,
the investor gets forty percent, or forty thousand dollars.
The entrepreneur gets sixty percent, or sixty thousand dollars.