Equity capital
refers to money raised in exchange for share of
ownership in a company (Business.gov). The financing
is raised by shares issued as ownership within
the company. The shares allow the owners to convert
the financial instruments to stock of the private
company. New companies that require quite a lot
of funds rely on equity capital for generating
funds. However, from an investor point of view,
equity financing pose high risks which is why
they usually cost more than the normal equity
financing. There are two types of capital financing,
namely angel and venture capital. The investors
of these types of equity financing are willing
to take the high risks involved in startup companies
with the view that it would rapidly grow within
a short time period.
Venture capital financing is for long term projects
which allow the company to grow and mature into
profitable organizations. Like the angel capital,
venture capital are also active form of financing
meaning the investors take active part in decision
making so as to help the company grow with high
returns. Hence investors in this category tend
to consider the firm's strategies and plans before
they invest. However, venture capitalists require
some form of collateral before they would lend
the company the funds. Venture capitalist however
does not interfere with the company's assets therefore
they tend to demand for higher rate of return.
Angel capital on the other hand provides the company
with high growth opportunities as these investors
is usually high net worth individual investors.
They do require higher rate of return from startup
companies. The angel investors rely on the leadership
of a lead investor. These investors tend to seek
active involvement within the business therefore
they act as mentoring and consulting entrepreneur
partners to the real owners of the company rather
than act as bystander.
In Rhonda's case, it would be ideal to seek venture
capital as it would allow her to manage her firm
with minimal interference from the equity capital
investors. Furthermore, venture capital allows
long term returns as compared to angel capital.
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