What is growth equity, and is it right for your business?

Growth equity is money from an outside investor, in exchange for a minority ownership stake, to help an established and growing company expand. You usually stay in charge day to day, and the investor gets a say in key decisions. It fits when growth needs more than your cash flow or a loan can fund.

Someone has brought up growth equity: an advisor, a banker, an investor who reached out. You want to grow without selling the company, and you are not sure what you would be signing.

What is growth equity, and how does it differ from other money?

Harvard Business School Online describes growth equity as capital invested in an established, growing company, typically in exchange for a minority share. It comes later in a company's life than venture capital, and unlike a venture investor, a growth equity investor can check a track record before putting money in. A buyout is a different deal, because the buyer takes control, which means more than 50% of the company.

The U.S. Small Business Administration puts the equity trade-off plainly: venture capital is normally offered in exchange for an ownership share and an active role, and almost all venture capitalists want a seat on the board. A loan keeps full ownership and control but brings payments. Self-funding keeps both and puts all the risk on you.

What do you give up with growth equity?

You give up part of the ownership and part of the freedom to decide alone. Ask what rights come with the money, because an equity agreement often covers a board seat, regular financial reporting, and approval over major decisions such as new debt, new shares, or a sale.

An equity investor also expects to sell its stake at some point, so the agreement usually addresses how and when that happens. Read those terms line by line before you sign anything, and ask what each approval right and exit provision would stop you from doing, because they shape what you can do with the company for years.

What do growth equity investors want to see?

According to Harvard Business School Online, growth equity investors typically require a growth strategy from the company, because they need to estimate what their stake could become. In practice that means five things:

• Several years of reliable monthly financial statements.
• A forecast with written assumptions, so the growth plan is concrete. How to do financial forecasting shows how to build one.
• A short list of KPIs that you review monthly. Key financial KPIs every business owner should track covers which ones.
• A clear account of what the money will fund, and the result it should produce.
• Organized documents, such as contracts, ownership records, and tax returns, ready to share when asked.

Is growth equity right for your business?

It can fit when your business already works and grows, the next stage needs more money than your cash flow or a loan can supply, and you are willing to share ownership and some decisions with a partner.

It is the wrong tool when you need cash to cover a squeeze, when you cannot name what the money will fund, or when sharing control is a dealbreaker. A loan keeps all ownership, so test it first. Do you really need outside capital? and the article on financing options for small businesses walk through that comparison.

What to do next

1. Write down what the money would fund, the result you expect, and the date you expect it.
2. Check the basics: reliable monthly financials for the last several years, a forecast, and the KPIs you review.
3. Ask whether your cash flow or a loan could fund the same plan, and what each would cost you.
4. If you still want equity, get your numbers ready before any conversation, and model what each proposed term would mean for your ownership and cash before you answer any term sheet.

To see how Surfside Capital Advisors helps owners get ready to raise, read about its work on the model, the story, and the data room investors expect.

Questions owners ask

How is growth equity different from venture capital?

Venture capital funds earlier-stage companies that are still proving their model, so the investor is betting on potential. Growth equity goes into an established company with a track record, so the investor can examine real results. In both cases you give up part of the ownership, and in both you should ask what rights come with it.

Do you have to give up control?

Growth equity is typically a minority share, so you usually keep majority ownership. The agreement can still give the investor approval over big decisions, which limits what you can do alone. Read those terms closely, and ask which decisions need the investor's consent.