Beyond Funding: The Multi-Faceted Benefits of Small Business Share Issuance

Is there another way for small businesses to raise capital apart from acquiring funds? Small companies can transfer ownership with others to get money and create a stronger and more successful company through shares. Issuing shares is like giving people a piece of the business; it’s not just about cash.

For example, During the initial quarter of 2023, there was a 3.6 percent increase in the initiation of new businesses in the United States. This spiked the funding rate as the increasing number of startups requires more capital to operate in the market.

Small businesses can issue shares called ownership. First,

• The company figures out how much money it needs and follows legal rules.
• The company determines the business’s value by setting a price for each share and issuing them to new owners.
• The shares, issued to raise capital, can fund growth, pay off debts, or invest in new projects.

Let’s discuss how the share issuance will impact your employees, investors, and the company.

How Does Share Issuance Help Small Businesses?

Shares in a small business are like teamwork — more than just money, they bring people together to build something strong. Issuing shares isn’t just about cash; it’s inviting others to join in, be part of a community, and help the business grow.Issuing shares in a small business is like a team effort, where each share adds to the success story of the business.

Businesses may choose to issue common or preference shares to their stakeholders by all means the benefits are as follows:

Capital Infusion: By offering shares to investors, the company can raise flexible funds for different needs like expanding, research and development, marketing, or paying off debts. This capital infusion is important for the small business’s growth and long-term sustenance.

Reduce Debt Burden: Small businesses can sell shares to get finances instead of depending only on loans and debts. This way, they have different sources of funds. It helps to lower the total debt and the interest payments, making the company’s financial situation more steady and long-lasting.

Access to Expertise: When small businesses sell shares, they usually get investors who bring more than just money. These investors might know much about the industry, have useful connections, or give smart advice. This is helpful for small businesses facing challenges and wanting to make smart choices.

Employee Incentives: Small businesses can use shares as part of an employee incentive or stock option program. This can attract and retain talented employees by giving them a stake in the company’s success. Employees who own shares are more likely to be motivated to work towards the company’s goals, aligning their interests with those of the business.

Increases Credibility: When a small business sells shares or becomes a public company, people trust it more. Customers, suppliers, and others see that the company is committed to growing and is okay with being looked at closely by the public. This trust makes collaborating and getting new opportunities easier for the business.

How does Share Issuance help employees, Investors, and the Company?

Shares from small businesses can be received by various individuals and entities, depending on the company’s structure, policies, and the stage of its development. Typically, a small business can give its shares to Founders and Employees, Investors, Venture Capitalists, etc. So it will have a positive impact on these stakeholders. Below are the reasons how:

Sharing company ownership with employees and investors is like fuel for a small business. It motivates workers, attracts supporters, and drives the whole team towards success. It’s a win-win-win strategy for everyone involved.

Employee Retention

When small businesses give their employees a piece of ownership through share issuance, it’s like saying, “Hey, you’re not just working here; you’re also a part-owner now!” Companies typically achieve this through programs such as Employee Stock Option Plans (ESOPs).

Imagine you work for a small company called EcoSprint, and they offer you a chance to own a slice of the company. This ownership doesn’t happen all at once; it grows over time or when you achieve certain goals. It’s like getting a bonus, but you become a part of the company instead of cash.

Now, why is this a big deal for you? Well, you have a strong incentive to stick around and do your best. As the company does well, the value of your ownership, or shares, increases. So, you get your regular paycheck and a chance to earn more as the company succeeds. This sense of being part of something bigger makes you more committed to your job and more likely to stay with the company.

For the company, it’s a win, too. They get a motivated and loyal team because employees are not just working for a paycheck; they are working to see the company succeed, which, in turn, benefits everyone who owns a piece of it. It’s like creating a team of owners working together for the business’s success.

Attracting Investors

With the same example, the business is doing very well. To take things to the next level, the company decides to give people a chance to own a piece of the company by issuing shares.

Now, let’s say there’s an investor named Alex. Alex sees this as a fantastic opportunity. By buying company shares, Alex becomes a part-owner of the business.

Why would Alex want to do this? As the company grows and does better, the value of Alex’s shares goes up. Also, Alex’s insight and professional advice can help the company grow. Investors can also easily sell or buy shares in the stock market, turning their investments into profits.

For the owner of TechSprint, this is beneficial too. By issuing shares, the company is getting money from Alex and other investors and bringing in people who believe in its business. This new cash can help TechSprint expand, develop new products, or reach more customers.

So, share issuance is like inviting others to join your business journey. Investors like Alex get a chance to be part of a successful venture, and the company receives the support and funds to make it successful.

Strengthening Financial Health

TechSprint wants to produce more and reach more people. For which they need money for better equipment, new ideas, and to tell people about their products.

So, instead of borrowing money from a bank and paying it back with interest, TechSprint asks people to invest in their company. They say, “Hey, if you give us $30, we’ll give you a share of our company.”

In the case of mergers and acquisitions, Techsprint can sell some of its shares to the Acquiring company instead of paying everything in cash.

So, in simple terms, by selling parts of their company (shares), The company got the money it needed to grow and got some new owners(shareholders) who believed in what they were doing. This helped them maintain their financial health overall.

Get your Small Business Valuation report from Eqvista!

Share issuance is significant for small businesses for various reasons, so getting the company valued is equally important. Share issuance is closely related to company valuation because the number and price of shares issued directly impact the overall valuation of the business.

Founders usually want their company to be valued as high as possible. To ensure the valuation reflects the real worth of the business, hiring a professional to do company valuation is needed. These experts provide 409a valuation reports, and from their expertise working with different companies in the industry, they can also suggest necessary changes to boost the company’s value.

At Eqvista, our team of valuation experts excels in this process. We have worked closely with various companies, helping them with cap tables, company shares, and valuation. Contact us today to get started!