Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
Lecture Notes
Chapter 13: Equity Financing for Entrepreneurs
Learning Objectives
• Define equity financing for entrepreneurs and outline its main stages.
• Illustrate the basics of enterprise valuation.
• Describe angel investors and how they finance entrepreneurs.
Notable Quote
• “There are two times for a young company to raise money: when there is lots of hope,
or lots of results, but never in between.”
What is Equity Financing?
• Equity financing: The sale of shares of stock in exchange for cash. (Splitting the
Stages of Equity Financing
• Seed stage financing
Notes:
There are several stages of investment, but for the purposes of this chapter we focus on the
initial stages of equity financing usually provided to young companies: seed stage financing,
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
product research and development; and early-stage financing consists of larger amounts of
funds provided for companies that have a team in place and a product or service tested or
piloted, but as yet show little or no revenue. Contap Inc., as explained in the Entrepreneurship
As the business grows and starts to take in more revenue, entrepreneurs may seek
second-stage or later-stage financing. Even further down the road, a profitable company
Stages of Equity Financing
• See Figure 13:1 Stages of Equity Financing
Forms of Equity Financing
• Angel investors: Informal investors that provide money for startups.
• Venture capitalists: Professional investors that generally invest in companies because of
perceived long-term growth potential.
Notes:
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
Differences Between Angels and Venture Capitalists
• ANGELS:
• Individuals worth more than $1 million
• Invest $25- $100 personal funds
• Fund seed or early-stage companies
• Carry out informal due diligence
• Responsible for own decisions
• Exit with returns on personal investment
Notes:
Differences Between Angels and Venture Capitalists
• VENTURE CAPITALISTS:
• Limited partnership
• Invest from $500,000 and up in VC funding
• Fund from early to late stage companies
Basic Valuation Factors
Notes:
The answers to the key questions will help investors determine an approximate value for your
business before giving you an idea of how much they are willing to invest. This is why it is
important to do your own homework in order to prove that your business is worth investing in.
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
Angel Investors
• After friends and family, angel investors support up to 90% of equity raised by startups.
• Angels invested $24.8 Billion in startups in 2013 (estimate).
• Angels funded almost 71,000 in early-stage ventures in 2013.
Types of Angel Investors
• Entrepreneurial angels
• Corporate angels
• Professional angels
• Enthusiast angels
• Micromanagement angels
Notes:
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
Venture Capitalists
• Often former or current entrepreneurs
• Usually professional money managers
• Seeking opportunities likely to return 10 times their investment in five years.
• Mainly invest in high-technology companies
• Usually invest in later stages
Notes:
Venture Capitalists
Notes:
Like angel investors, VCs are often former or current entrepreneurs but, unlike angels, they are
How to Find the Right VC
• Find investors who can provide the amount of capital you need.
• Check whether they are interested in investing in your company’s current stage of
How to Find the Right VC
• 4. Look for VCs that can provide advice, contacts, moral support, etc.
• 5. Make sure they have the time and commitment to support your venture.
Notes:
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
When you as an entrepreneur get the opportunity to meet with a VC, it is important to be
prepared. You will be expected to explain clearly and concisely the market opportunity your
business presents; the size and potential growth of your market; why customers will be
Critical Thinking Questions
• Why do you think VCs tend to “bury their dead quietly”?
• 2. Do you think it’s important to learn about failures as well as successes? Why or why
not?
Due Diligence Process for Angels
• Founders
• Legal
• Market
Critical Thinking Question
• You’re in a meeting with an angel investor whose funding could jump-start your
venture. How would you feel if you had to answer the investor’s questions with “I don’t
know” several times in a row?
Entrepreneur’s Dilemma
Notes:
The typical “entrepreneur’s dilemma” is choosing between retaining significant ownership and
control versus securing substantial funding. The venture typically starts with finding partners
and securing initial funding, followed by formal founding and registration of the business. As
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
The Trade-Off Entrepreneurs Make
Notes:
Being pushed out or moved to a “lesser” position can come as a real shock to entrepreneurs
who have worked tirelessly on building their ventures from the ground up, as well as to
employees who have worked alongside them. In fact, the way this leadership transition is
Hypothetical Startup
• Finding a co-founder
• Finding early funding
Critical Thinking Question
How Startup Funding Works