Disadvantages of Equity Funding
Unlike bank loans, equity funding is provided after a hectic due diligence of the business. The investor satisfies himself assessing the technical, marketing, business development, intellectual property, brand value, legal, financial, corporate, regulatory, human resource, contractual, etc aspect in detail through a hectic due diligence. This is because once the equity is provided the investor has to be here all the risks of the business without any recourse. Hence, it is very difficult for an unprofessional, incompetent business without any profitability or growth potential to get equity funding form third-party unrelated investors. From the perspective of the previous shareholders, investment dilutes their ownership and control of the company. They have to share all the fortunes with the new investors in a fixed proportion. If the parties have not entered into a professional shareholding agreement and if they have not defined the roles and responsibilities of each of the individuals, equity funding may bring in friction in the board of directors and shareholders of the company. The decision making in the company may not be smooth. Apohan provides corporate management services to businesses to draft professional shareholding agreements and implement a decision making mechanism. Disharmony in the board or among shareholders is not the intrinsic demerit of equity funding, but it is indication of incompetent management. Generally, the cost of raising equity fund is higher and the time frame required to complete the process is longer.