How does "expanding equity" work
I often read about small private companies needing an equity partner to "expand the equity base" to be able to expand their business in ways they otherwise couldn't. So the company might sell a 25% stake to such a partner. But how does this actually benefit the company financially? Doesn't the money just go into the pockets of the exiting shareholders?
I can only speak for smaller companies/growth equity.
You often sell equity and keep the proceeds in the company to help it scale. Usually you want to sell just enough equity to get to a point where you can grow the company to a point where good options for debt come into play.
For example, if you're doing less than $1.5M/$2M in EBITDA, your options for non-recourse debt really suck as $2M in EBITDA is the general floor for getting non-recourse debt at a decent/sensible price.
There is usually some level of liquidity offered to existing shareholders too. So if you raise $5M, a small portion of that might go to founders to provide them with some liquidity and then the rest to scale the company.
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