As an entrepreneur, chances are your business idea has come from a particular passion of yours for a specific industry. Apart from this, it is also of the utmost importance you find a gap in the market and that your business is highly relevant, offering a product or services that are in demand. Only this way can you make a profit and generate revenue.
The financial success of a business means that it can draw investors, whether this is a goal for the company or not. If it is, by selling stock to investors, or equity, you can drive the business further with the cash received from the transaction without the need for a loan. This is called equity financing.
Apart from investors, the main stakeholders of a business include its employees, suppliers, and customers. Essentially, these are vital parts of a corporation, with an interest in the business and its evolution, who can affect its success. At the same time, they can also be affected by the company’s operations.
Having said this, equity management is a vital aspect of a business, as it encompasses all the elements of creating and maintaining owners within an organization. This process is not simple. Or rather, it is a challenge to manage shareholders and stakeholders properly, but with the right software program, the hassle of equity management is eliminated.
Without further ado, here is why equity management is vital in a company, no matter its size:
Attracting new investors or members
With proper equity management in place, your business becomes more attractive to new members or possible investors. With this, your company is more accurately evaluated at its correct value. Any business’ goal is to expand or maintain profitability. For this reason, equity management is crucial, as it can draw interest from other members who can finance expansion.
If you have a start-up business and you are only at the beginning of the road in terms of business growth, you might not yet have plans of attracting investors. However, this should be a long-term goal. Even though you have a small scale company, it is crucial you develop strategies while keeping an open mind for expanding the business. Therefore, equity management is an important step towards this goal. With a good one in place, you keep a track of your business’ financial situation, are able to value it accurately from the beginning, so when you decide to expand it, your portfolio is ready for possible investors or new members.
Keeping current stakeholders satisfied
Apart from the fact that you can attract new investors or members to your company with equity management, it is also a vital part of maintaining your current stakeholders satisfied. This means your employees and suppliers can see updated finances and your company’s potential for growth. If your stakeholders are kept in the loop and have access to vital documents, they will continue to be motivated to invest time, money, and resources in your business. This is an effective method of retaining your current stakeholders.
Suppose you have an enterprise employing steward ownership, where active stakeholders are the ones involved in the decision-making process rather than shareholders or other remote investors. In that case, it is of the utmost importance your company’s equity management is a top priority within the business. Because current stakeholders have such a significant role, only with a proper equity management can you keep a track of all the business operations while keeping every person of interest updated. Any action taken within the company, like the equity transactions or maintaining compliance are part of the equity management process.
Encouraging financial growth
With an effective and well-established equity management in place, your company has higher chances of accomplishing financial growth and success. Whether you are ready to offer equity or not, it is highly advisable to build a solid equity management plan. There are software programs that can help equity administrators with this process and facilitate it, as it can become quite overwhelming. More specifically, the role of an equity administrator is not easy because they are responsible for overseeing various aspects of the equity system such as:
- Keep track of the company’s shares and any completed or future equity transaction;
- Company 409a valuation, which is a must once you decide for the company to offer stock. This evaluation sets each stock’s price and it is necessary you get an appraisal every year.
- Staying compliant: This ensures your company abides by specific rules and regulations when it issues equity.
- Managing the cap table: This table is vital, as it provides a detailed analysis of the company’s ownership status in percentages, the value of equity, warrants and convertible notes. Evidently, it is a highly important analysis for investors and stakeholders, which informs future possible investments.
There is no denying that equity management is a complex process, but it is an indispensable one in achieving financial growth. Once you do this, not only will you be able to support your stakeholders but also inform them, and future members, of your company’s financials and KPIs, encouraging financial growth and, therefore, driving the business further.
Members become more involved in the business
As mentioned earlier, employers, investors and suppliers who are stakeholders of a company, are much more motivated to see the business grow, given that they have a stake and interest in this endeavour. Essentially, there is a mutual interest from everyone involved in the business to drive it further, as each member contributes towards this goal. This being said, with this type of involvement, comes great responsibility. However, members are highly committed and dedicated to all the responsibilities involved as long as they are ensured their equity is properly invested and managed.
For this reason, equity management is crucial in a business. Without a proper equity management in place, members become skeptical and less confident in regards to their investment, which can affect the business performance heavily. Therefore, it is vital you maintain members interested and involved in the future of your company. In order for this to happen, equity management is important.