Equity Finance Flashcards
1
Q
What is equity finance?
A
Equity finance is when a company raises money by selling shares to investors. In return, investors become shareholders and own a part of the company. Unlike debt finance, equity finance does not require repayment, and there is no interest.
2
Q
What is the legal principle of equity finance?
A
Equity finance involves issuing shares, which is regulated by the Companies Act 2006:
s. 550 & 551 CA 2006: Directors must have authority to allot (issue) new shares.
s. 561 CA 2006: Existing shareholders have pre-emption rights (they must be offered the new shares first before they are offered to others).
3
Q
What are the advantages of equity finance?
A
- No repayment obligation:
Unlike loans, equity finance does not need to be repaid. This reduces financial strain, especially for businesses with uncertain cash flow. - No risk of losing assets:
Since there is no debt, the company does not have to provide collateral or worry about asset seizure. - Brings in expertise and networks:
Investors often bring valuable business expertise, industry connections, and advice, which can help the company grow. - Can raise large amounts of money:
Equity finance can raise significant capital, especially for expanding businesses, without increasing debt.
4
Q
What are the disadvantages of equity finance?
A
- Loss of control:
Issuing new shares dilutes ownership, meaning the original owners have less control over company decisions. Shareholders may vote on key business matters. - Sharing profits:
Investors may expect to receive dividends, reducing the profits available for reinvestment in the business. - Increased legal and administrative work:
Issuing shares involves legal compliance, including filing with Companies House, maintaining a share register, and holding shareholder meetings. This can be time-consuming and costly. - Potential conflicts with investors:
Investors may have different priorities or expectations, which could lead to disagreements on how the business should be run.
