It is rare to use animal imagery to describe the business activities of a firm. However in terms of looking at the issues of business equity, I feel that it is appropriate in this case to describe how a business tries to survive in the market. If the company is taken to be like a living organism, then the entrepreneur is the head, while the cells are the business equity.
The market will exert external pressures and will test all the resolve and competencies of the business. Where they are found to be lacking in survival skills, the business will fail and other businesses will take its place. Where it is found to be coping, other businesses will merge with it or copy the type of activity that it is doing. This is the evolutionary equivalent of business cycles.
Why turn to equity finance to survive ?
Business fail and even if they do not fail, they may go through a rough patch. The lifeline for the business is always the means of production and more importantly the avenues to sell the end products and/or service that they produce. Without money there is no means of production and there is nothing to sell. Profitability only arises after these two fundamental issues are adequately addressed.
Imagine that a business has seen an extended lull in its customer base. The sales figures are falling and they only have inventory or raw materials to show for their investment. They require a loan or other form of funding to sustain the business or to pay for essential means of production such as salaried workers. One option is to go to venture capitalists who will be seeking to exploit the failing company to the maximum.
The other option than looking for venture capitalist is to look to raise income or investment from the existing values of the company. In effect you are selling your equity in exchange for cash. This is what is known as equity finance. It is a means of utilizing business equity to obtain funding for survival or other projects within the business.
Who gains what and at what cost ?
The investor who provides equity finance will want to see a significant growth level and a current evaluation which indicates that your business is a viable enterprise. They will want to make sure that they are not throwing good money after bad. Therefore you will be expected to open up the books, so to speak.
It is imperative to prove the existence and the value of business equity in order to attract equity finance investors. These are people who will in effect have a share in your company profits but also share in the losses when they arise. Their main aim will be to maximize the profits and to minimize the losses.
The risk for the equity finance investor is that they are usually in the deal with you for the medium to the long term. If your company is hopeless then they will lose their money. The risks for the entrepreneur are that they are effectively handing over control of their organization to a group of investors.