What is equity funding?

Raising equity funding is one of the most common routes taken by early-stage businesses that need capital to grow but do not want — or cannot qualify for — debt financing. The concept appears frequently in startup and investment conversations, but founders new to the idea are often unclear on exactly what equity funding involves and what the practical implications are of giving up a stake in their business.

Equity funding means raising capital by selling a share of ownership in your business to investors. In exchange for their investment, investors receive a percentage stake in the company. Unlike a loan, equity funding does not require repayment on a fixed schedule, but it dilutes the founder's ownership and gives investors a claim on future profits and, in most cases, some influence over business decisions. Equity investors typically seek a return through a future sale or exit rather than regular income.

Giving up equity is a significant decision — the stake sold in an early funding round cannot typically be recovered without buying it back, and taking on investors changes the nature and governance of the business. Understanding the different types of equity investors and what each typically expects is important groundwork before pursuing this route. Our guide to equity funding for UK founders covers the key considerations.