What Is An Equity Offering?

When running or starting your own business, eventually you will start to toy with the idea of expansion. However, expansion requires money. 

Knowledge really is power when it comes to expanding a successful company. Start-up advisory services are often asked questions such as ‘Should I pay myself a salary from my LLC?’ and ‘Do angel investors have to be accredited?’. Knowing the answer to these questions and any others you may have is crucial to ensuring that you know how to properly finance an expansion of your business. 

Here we look at the concept of equity and explore equity offerings along with their advantages and disadvantages. 

Definition Of An Equity Offering

In short, an equity offering is when a company sells shares of its business to outside investors as a means of raising capital. Doing so results in a cash injection that can then be used to invest in the company any way its management believes is an effective way of growing the company. 

Equity offerings can occur as an Initial Public Offering (IPO) or at later stages after an IPO, known as secondary offerings. Equity offerings are a way of raising capital without putting debt on balance sheets that has to be repaid to lenders. 

Advantages Of An Equity Offering

The benefits of an equity offering can be substantial to a new company or start-up. 

Improved Cash Flow

The cash injection that a company receives from an equity offering can help facilitate its ability to grow. The money can be used for any purpose such as research and development or hiring new and more effective talent. Having cash on hand to invest in opportunities that give it the ability to succeed can make a big difference.

Good For Publicity

IPOs can help a company generate publicity. There is often a great deal of interest that surrounds an IPO and, as a result, a larger number of people become acquainted with the company and what it offers. Consequently, a company can see its share price rise, as well as the number of customers increase, which translates into more sales. 

No Debt

While an equity offering can be used to pay down debt, it also means that the company does not have to take on more debt to grow. Debt needs to be repaid and those repayment costs can be expensive and a significant drain on a company’s resources. Shareholders do not need to have their investment repaid because it is not a loan; their investment is a form of ownership in the company.

Disadvantages Of An Equity Offering

An equity offering can offer a company many benefits, but it does come with the following disadvantages. 

Less Control

The biggest disadvantage that business owners and start-up investors confront when taking a company public through an equity offering is losing control because their stakes in the company are diluted during the issuance of more shares. When shareholders own the company, management is now responsible to them. Management must always have shareholders’ best interests at heart and sometimes that may be at odds with what management actually wants to do. 

Risk

Taking a company public with an equity offering is risky. Not only does it take a great deal of time, money and effort to conduct an IPO, but once a company’s stock is available to buy and sell on the market, it can struggle to keep its share price high enough to satisfy shareholders. That can leave companies vulnerable to takeovers (hostile or otherwise) and owners losing further control. 

More Compliance

As a means to protect investors, public companies are regulated by the Securities and Exchange Commission. This means that public companies have to conduct regular and periodic audits, along with generating extra financial reports. In practice, compliance with regulations and associated paperwork is time consuming, costly and can often put the company under a public microscope.

Conclusion

Equity offerings can be an exciting opportunity for a business. Raising capital in this way is usually a sign that the company is successful and still has potential for future growth. It is not the right option for every business though. Conducting an equity offering should only be completed with the appropriate amount of due diligence to ensure it is the right course of action.