How Does Equity Financing Work? (2025 Updated)

Contents

What Is Equity Financing?

Equity financing is a method of raising capital by having an investor provide funds in exchange for shares in your company. In 2025, this remains a popular option for startups and small businesses that are looking to accelerate their growth. Common sources of equity financing include:

Friends and family
Angel investors
Venture capital
Accelerators/ incubators

Equity financing can open up significant growth opportunities by providing the funds required to scale operations, launch new products or expand into new markets. It also helps to share risk with investors who believe in your long-term vision.

Why Use Equity Financing?

In the competitive business environment of 2025, accessing the necessary capital can be challenging. Traditional lenders such as banks are often reluctant to fund high-risk ventures. Therefore, many entrepreneurs turn to equity investors who share their enthusiasm and confidence in the potential of their ideas. By exchanging a portion of ownership for investment, you gain not only vital financial resources but also strategic support from experienced investors. For more guidance on funding strategies, check out our Business Set-Up guide.

How Do You Do It?

Completing an equity financing deal is a multifaceted legal process. Broadly, there are four main steps:

Negotiate the key terms – Before finalising the deal, it’s wise to agree on the key terms of the investment in a Term Sheet. A lawyer can help you draft this document, ensuring that both you and the investor are clear on the principal points of agreement. You might also find our article on what makes a contract legally binding useful for reference.
Share Subscription Agreement – This is a legally binding agreement where the investor commits to transferring funds in return for a specified number of shares at an agreed valuation. Often, there are extra conditions to protect the investor’s interests, such as:
- Board appointment rights – Investors often request a seat on the board to have oversight on key business decisions.
- Preference shares – These shares come with additional rights, giving investors favourable anti-dilution protection and priority during liquidation events.
- Share vesting – This mechanism is used to incentivise founders to remain with the business by releasing their shares only after achieving certain milestones over a set period.
Shareholders Agreement – This document governs the relationship between founders and investors, outlining rights, obligations, and how future disputes should be resolved. It is essential for maintaining clarity and protecting your business interests as you grow.
Companies Office updates – Finally, the company’s Companies Office register must be updated to reflect any changes in shareholdings and directorships.

Additionally, it’s important to consider that equity financing can help bring on board investors who might also contribute industry expertise, market connections, and strategic guidance. For further insights on starting a business and securing the right funding, our guide on Legal Essentials for Your Business is an excellent resource.

Equity Financing Example

Ev has developed innovative software designed to organise email inboxes efficiently. Although the product is fully developed, Ev requires additional capital to boost marketing and sales efforts. Recognising the software’s potential in today’s digital landscape, Ev’s friend Laura offers to invest. In exchange for a 10% stake in the company, Ev agrees to issue shares to Laura in return for an investment of NZ$30,000. To formalise the arrangement, both parties sign a Share Subscription Agreement, and a comprehensive Shareholders Agreement is enacted to detail their mutual rights and obligations. The funds provided by Laura are then channelled into the business, facilitating enhanced marketing efforts and broader market penetration.

Recent Trends in Equity Financing

In 2025, equity financing is becoming increasingly accessible as digital platforms and regulatory reforms streamline investment processes. Entrepreneurs are now exploring hybrid models such as crowdfunding equity, which allows a broader base of smaller investors to participate in funding rounds. For more detailed information on adjusting your business strategies to the current market, you may want to read our guides for starting a business from home that also touch upon evolving capital raising strategies.

Need Help With Equity Financing For Your Business?

Raising capital through equity financing can provide the essential boost your business needs – but preparing a Term Sheet, Share Subscription Agreement, and Shareholders Agreement without professional advice can be risky. It is important to ensure all legal documents are robust and comprehensive. Investing in expert legal support can save you from future misunderstandings and costly disputes. For further reading, our article on why a lawyer should review your contract offers valuable insights.

At Sprintlaw, our team of experienced solicitors is well-equipped to assist you with drafting or reviewing essential documents involved in an equity financing deal. Whether you need help with your Term Sheet, Share Subscription Agreement, Shareholders Agreement, or other legal aspects of funding, we are here to help. For comprehensive support, you can also explore our Business Set-Up services. Get in touch with one of our consultants for a no-obligation chat about how we can help secure the best possible deal for your business. You can reach us at 0800 002 184.

Minna Boyle

Minna is the Head of People & Culture at Sprintlaw. After completing a law degree and working in a top-tier firm, Minna moved to NewLaw and now manages the people operations across Sprintlaw.