Equity financing is the process of raising capital by selling ownership stakes (shares) in your business to investors. In exchange for their money, investors receive a percentage of the company and a share of future profits, but the capital does not need to be repaid.
This stands in contrast to debt financing, where you borrow money and repay it with interest. Most growing businesses use a combination of both, with the right balance depending on the stage, sector, and goals of the business.
How Equity Financing Works
When a limited company raises equity financing, it issues new shares to investors. The price per share is determined by the company’s valuation at the time of the investment.
For example:
| Element | Value |
|---|---|
| Pre-money valuation | £1,000,000 |
| Investment amount | £250,000 |
| Post-money valuation | £1,250,000 |
| Investor’s ownership | 20% (£250,000 / £1,250,000) |
| Founders’ remaining ownership | 80% |
The investor now owns 20% of the company. If the company later sells for £10 million, the investor receives £2 million (a 8x return on their £250,000 investment), while the founders receive £8 million.
Sources of Equity Financing in the UK
Friends and Family
The earliest equity investors are often people who know and trust the founders. Amounts tend to be small (£1,000 to £50,000), and arrangements should still be formalised with proper shareholder agreements.
Angel Investors
Angel investors are wealthy individuals who invest their own money in early-stage businesses. Typical investments range from £10,000 to £250,000, often with mentorship and introductions included.
Venture Capital
Venture capital firms invest pooled capital from institutional investors into high-growth businesses. Investments typically start at £500,000 and can reach tens of millions at later stages.
Crowdfunding
Equity crowdfunding platforms like Seedrs and Crowdcube allow businesses to raise capital from hundreds or thousands of individual investors, with minimum investments as low as £10.
Private Equity
Private equity (PE) firms invest in more mature businesses, often taking majority stakes. PE deals typically involve established companies with proven revenue and profitability.
IPO (Initial Public Offering)
Going public on a stock exchange (such as the London Stock Exchange or AIM) is the ultimate form of equity financing, giving access to capital from public market investors. This is typically only suitable for larger, more established businesses.
UK Tax Incentives for Equity Investment
The UK government actively encourages equity investment in early-stage companies through tax relief schemes:
SEIS (Seed Enterprise Investment Scheme)
- Investors receive 50% income tax relief on up to £200,000 invested per year
- No CGT on gains from SEIS shares held for 3+ years
- Companies can raise up to £250,000 through SEIS
EIS (Enterprise Investment Scheme)
- Investors receive 30% income tax relief on up to £1 million (£2 million for knowledge-intensive companies) per year
- No CGT on gains from EIS shares held for 3+ years
- Loss relief if the company fails
- Companies can raise funds through EIS up to a lifetime limit, which was raised from 6 April 2026
These schemes significantly reduce the effective cost of equity investment, making UK startups attractive to investors.
Valuation
Agreeing a company valuation is one of the most critical and contentious parts of equity financing. Common methods include:
- Revenue multiples — Valuing the company as a multiple of its annual revenue (common for SaaS and tech businesses)
- Earnings multiples — Valuing based on profit, suitable for profitable businesses
- Discounted cash flow (DCF) — Projecting future cash flows and discounting them to present value
- Comparable transactions — Looking at what similar companies sold for
- Asset-based valuation — Based on the balance sheet value of assets minus liabilities
At the seed stage, valuations are often more art than science, based on the team, market size, and traction rather than hard financial metrics.
Dilution
Every time you issue new shares, existing shareholders’ percentage ownership decreases. This is called dilution.
| Round | New Investment | Valuation | Founders’ Ownership |
|---|---|---|---|
| Formation | — | — | 100% |
| Seed round | £200,000 | £800,000 pre-money | 80% |
| Series A | £2,000,000 | £8,000,000 pre-money | 64% |
| Series B | £10,000,000 | £40,000,000 pre-money | 51.2% |
While the founders’ percentage shrinks, their shares are worth more at each round if the company’s value is increasing. Owning 51% of a £50 million company is worth far more than owning 100% of a £800,000 company.
Equity Financing vs Debt Financing
| Feature | Equity Financing | Debt Financing |
|---|---|---|
| Repayment | No repayment required | Must repay principal + interest |
| Cost | Share of future profits and ownership | Interest payments |
| Cash flow impact | No regular payments | Monthly repayments reduce cash flow |
| Risk to business | Low (no default risk) | High (missed payments can lead to insolvency) |
| Tax treatment | Dividends not tax-deductible | Interest payments are tax-deductible |
| Control | Investors may have board seats and voting rights | Lender has no control (unless you default) |
| Upside sharing | Investors benefit from growth | Lender receives only agreed interest |
For more on the debt side, see our guide to debt financing.
Advantages of Equity Financing
- No repayments — Capital stays in the business to fund growth
- No interest — Reduces the burden on cash flow
- Shared risk — Investors bear the risk alongside you; if the business fails, you do not owe them money
- Strategic value — Good investors bring expertise, networks, and credibility
- Enables larger raises — Equity can fund bigger ambitions than most debt facilities
- Strengthens the balance sheet — Equity appears as shareholders’ funds, improving financial ratios
Disadvantages of Equity Financing
- Dilution — You give up a share of ownership permanently
- Loss of control — Investors gain voting rights and may require board representation
- Profit sharing — Future dividends and exit proceeds are shared with investors
- Expensive in the long run — If the business succeeds, equity is the most expensive form of finance (a 10x return to investors far exceeds any loan interest)
- Time-consuming — Raising equity takes months of preparation, pitching, and legal work
- Public disclosure — Share allotments must be filed at Companies House
When to Choose Equity Financing
Equity financing is typically most appropriate when:
- Your business is pre-revenue or early-stage and cannot service debt
- You need significant capital that exceeds available debt facilities
- The business model requires a long runway before profitability
- You want investors who add strategic value beyond just money
- The business has high growth potential that will make dilution worthwhile
For businesses with stable revenues and predictable cash flows, debt financing is often more efficient because it preserves ownership and is tax-deductible.
Keeping Clean Records
Whatever form of equity financing you pursue, maintaining accurate accounting records is essential. Investors will conduct due diligence on your financials, and sloppy bookkeeping is one of the fastest ways to kill a deal.