Private equity: everything you need to know about raising equity capital

What is equity financing?

Equity financing is the injection of funds by partners or shareholders to finance a company.

Many means of financing exist: business angels, bank loans or grants. What are the characteristics of private equity? Zoom on this method of financing.

Definition of equity

Equity corresponds to equity capital brought in by partners or shareholders to finance a company.

In reality, it is a financial value that is also called equity or investment capital. If the company is liquidated, the shareholders receive this financial value. 

Private equity can be divided into several categories: 

• Venture Capital
• Development capital
• LBO
• Turnaround capital
• BSCPE

Who is private equity for?

Generally, companies that are still in the process of proving themselves have recourse to private equity. Companies that are not yet strong enough to be listed can also use it. 

Difference with public equity

Unlike private equity, public equity involves opening up the capital of a company that is listed on the stock market to potential investors. These investments are less risky for investors and give access to the capital of a company to a larger number of people. 

The choice of investors

Before thinking of looking for the value of the amount you want to raise, it is important to identify the investors and funds that are best suited to accompany you on a daily basis. 

There are many different fund companies, and it will depend on a number of elements: the maturity of your project, your professional experience, the value you bring through your project, etc. 

Don't worry about missing out on an investment opportunity with a fund. The companies and investors are always there, and the smartest thing for you to do is to find the ones that can bring you the right amount of money for your projects. 

What are the advantages of equity financing?

Support & expertise

The support of private equity funds is valuable and represents a real material and immaterial asset for your company.

If you have chosen the investors that best correspond to your needs and sector, their support will be strategic in the progress of your project.

Address book

At any stage of a company's maturity, networks and contacts have a role to play in strategy, execution and exploring development opportunities.

Private equity investors and networks can provide companies with the best possible support by sharing their address book, when relevant. 

By investing in your business or project, their interest is that you succeed and therefore will apply themselves through this sharing of expertise and knowledge.  

No limit of amount 

Depending on your needs, funding may depend on:

• your company's profile, 
• your reputation 
• your experience as an entrepreneur, 
• and of course, the fund with which you plan to raise capital.

There is no limit to the amount of money you can raise in private equity. The only limits, strictly speaking, are the perceived value that your project or company brings to its beneficiaries and to the investors.

The amount depends on the confidence these investors have in you and your project and your feasibility to implement it. 

No interest

Unlike bank loans, you have no repayment or interest on the amount invested in your business through private equity. 

Raising money with business angels or through grants is a solid way to bring in capital, but some may feel that private equity has more advantages than coaching. 

It is important to keep in mind that each fundraising method has its own particularities and is not necessarily suitable for all types of businesses or entrepreneurs. 

What are the disadvantages of equity financing?

Loss of autonomy in management

Of course, raising from fund management companies means giving up part of your company's capital in exchange for the investment. 

Depending on the maturity of your company, the amount of money you have raised in the past or even the way you want to run your business, equity financing reduces your influence in the management of the company. 

It can even be binding if opinions diverge in times of crisis or on key issues where opinions are divided. 

A time-consuming practice

Equity financing is not always the most straightforward in terms of time to invest in finding investors, but also during the procedures. 

Indeed, several meetings take place, so that the agreement is found between you and your potential investors.

This can take up a lot of the CEO's time, which he cannot devote to running his company and his core business. 

There are many elements to prepare and present during these procedures, even before opening its capital to investors. 

How does equity financing work?

Companies looking for financing can resort to private equity. In concrete terms, there are several scenarios. The search for shareholders can take place at different times in the life of a company. 

For example, at the creation of the company, the constitution of the original share capital will include the participation of investors. Later in the life of the company, if investors wish to take an equity stake, this is called a capital increase. 

An investor who invests in equity with his or her own money, subsequently obtains shares in the company. Depending on the number of investors, the amount invested, or the maturity of the company, the number of shares as well as its value may change. 

The number of shares held by the investor is thus calculated in proportion to the equity he has contributed to the company. For example, it depends on the right to dividends, the right to vote or the right to own the assets. 

In private equity, investors can invest in the company throughout its life cycle, depending on the risks and growth potential.    

What are the stages of equity financing? 

1. Identify the funds that are relevant to your needs, both financial and in terms of expertise, as well as to your sector of activity. 
2. Contact: use your business network and ask for intermediaries, or apply directly via their website. 
3. Presentation: In a few minutes or hours, you will have to convince the fund to join the capital of your company. 
4. Anticipate legal negotiations (NDA).
5. If all goes well, you will receive a Letter of Intent or Letter of Interest (LOI) outlining the fund's interest in your business. Negotiate the best terms! 
6. Due diligence of risks and many aspects of your business (accounting, financial, social, legal...). Be the most thorough on your project.
7. The Letter of Commitment (LOF) validates the financing in your company according to the negotiated conditions. 
8. Legal negotiations of the term sheet in order to distribute the capital and the possibilities & prohibitions. 

What are the alternatives to equity financing?

The BSA-AIR 

For young entrepreneurs, the BSA-AIR, known as Bon de Souscription d'Actions par Accord d'Investissement Rapide, is quite topical. It consists of a private contract between a company, generally young, and investors. 

In exchange for a financial contribution, the company offers investors preferential rates on future share issues. 

In concrete terms, this mode of financing is interesting because it allows entrepreneurs to obtain capital quickly and economically, with simpler (legally) and more flexible processes than raising equity capital. 

Certain conditions however: the company must be able to achieve good financial results, and must show a certain growth in development. 

The investor can therefore obtain preferential prices when purchasing the shares and will earn an average discount of 20%. 

As with equity raises, the company has to give up a share of the company's capital, which can be a disadvantage on future dilutions.

The business loan

The professional loan or credit is a credit granted to legal entities, called companies, or to individuals who are self-employed. It is a loan reserved only for professionals. 

A bank loan involves a borrower, often a company, and a lender, which is usually a banking institution.

In addition to an interest rate to be paid to the bank, the business loan involves a guarantee, such as a mortgage or a joint and several guarantee. 

Professional loans are suitable for any type of activity (commercial, craft, liberal or even agricultural).

Similarly, the size of the business does not matter, although a good start or cash flow is a factor for success. Therefore, a business loan is not recommended for all types of start-up businesses. 

RBF (Revenue-Based Financing)

The Revenue-Based Financing (RBF) is an innovative financing method based on the future revenues of a company. This financing is non-dilutive as there is no transfer of capital in exchange for the financing. 

RBF financing is generally more suitable for digital companies, SaaS, or e-businesses. At Karmen, this solution allows you to benefit from a non-dilutive, digital and fast financing solution in less than 48 hours. 

To check if you are eligible for funding, it's very simple. Simply connect your company's read-only financial tools to our algorithm.

If you are eligible, you will be offered a transparent offer with no hidden fees. You can receive the first transfer within 48 hours. It's simple, fast and efficient! 

Several products are available from Karmen to best meet your needs. The Karmen offer provides you with rapid cash flow and enables you to finance your growth efficiently.

Are you planning to raise funds? Karmen can help you prepare for it with the Karmen Runway product.

If you're short on cash for your working capital needs, we recommend you look into Karmen Invoice Financing.

The requirements and procedures of private equity are numerous. However, it is a process that generally works very well and can be a viable option for your business. The important thing is to be well informed about all the procedures and ways to raise funds, in order to make decisions that are most relevant to the development of your business. RBF can be a simple and non-dilutive alternative to private equity.