How Does Equity Financing Work? (2025 Updated)

Contents

What Is Equity Financing?

Equity financing is when an investor provides capital to a company in exchange for a stake in the business – typically, shares in the company. In 2025, this remains a popular method for startups and small businesses to secure the funds needed for growth and innovation. Common sources of equity financing include:

Friends and family
Angel Investors
Venture Capital
Accelerators/Incubators

Equity financing can open the door to significant growth opportunities, particularly in today’s rapidly evolving market. With investors increasingly focused on sustainable and innovative business models, securing equity financing can provide the competitive edge needed to thrive in 2025.

Why Use Equity Financing?

For new businesses, raising the necessary capital can be challenging. Traditional bank loans often come with stringent requirements and higher scrutiny, making equity financing an attractive alternative. By partnering with investors who believe in your vision, you not only secure vital funds but also gain access to valuable expertise and networks. This investment enables you to scale operations, drive product development, and broaden market reach. For more insights on how to boost your business’s financial foundation, check out our comprehensive guide on business finance.

How Do You Do It?

Securing an equity finance deal is a detailed and multi-step legal process. Broadly, there are four essential stages:

Negotiate the key terms – Before any deal is finalised, it’s prudent to agree on the principal terms through a Term Sheet. A lawyer can help you draft this document, ensuring clarity and minimising the possibility of future disputes. You might also find it useful to review our contract redrafting services for added security.
Share Subscription Agreement – This is a legally binding agreement outlining the investor’s commitment to fund your company in exchange for shares at an agreed valuation. Frequently, this agreement includes additional conditions such as:
- Board appointment rights – Investors may request representation on the board to influence key decisions.
- Preference shares – These come with extra rights, including favourable anti-dilution measures and preferential returns in liquidation.
- Share vesting – This mechanism incentivises founders to remain with the company by releasing their shares over specified timeframes or milestones.
Shareholders Agreement – This document governs the relationship between founders and investors, detailing rights, obligations, and exit strategies. For a broader perspective on setting up your business structure, see our company set-up guide.
ASIC updates – Finally, your company’s details must be updated on the ASIC register to reflect the new shareholdings and any changes in directorship.

In 2025, the equity financing landscape has evolved further with the advent of digital platforms and streamlined regulatory frameworks. Innovative funding routes, such as mini-IPOs and equity crowdfunding, are now complementing traditional investment methods. Many investors now prioritise businesses with robust intellectual property frameworks and clear exit strategies, so ensuring your legal documentation is solid is more important than ever. For additional guidance on protecting your business ideas, visit our IP protection resources.

Equity Financing Example

Ev has developed innovative software to streamline email management. Although the product is fully operational, Ev needs additional funding to boost marketing and sales initiatives. Recognising the potential, her friend Laura offers to invest in the company. Ev agrees to issue 10% of the shares to Laura in exchange for $40,000. To formalise this arrangement, they both sign a Share Subscription Agreement and a detailed Shareholders Agreement that clearly sets out their rights and obligations. The funds provided by Laura are then dedicated to expanding the software’s market presence.

Need Help With Equity Financing For Your Business?

Raising capital through equity financing can provide the crucial boost your venture needs, but navigating the legal intricacies of Term Sheets, Share Subscription Agreements, and Shareholders Agreements without professional guidance is a risky proposition. Ensuring that every clause is meticulously drafted can help prevent future disputes and secure your interests as your business grows. It’s always a smart investment to engage a lawyer who specialises in corporate finance – a one-off cost that can save you considerable hassle later on. You may also want to explore our legal tips for startups to further fortify your business strategy.

At Sprintlaw, our experienced team of legal professionals is ready to assist with every aspect of the equity financing process. Whether you need help drafting a Term Sheet, reviewing a Share Subscription Agreement, or setting up a comprehensive Shareholders Agreement, we’re here to support your business ambitions. Contact one of our consultants for a no-obligation discussion on how we can help you negotiate and finalise an equity financing deal that sets you up for success in 2025 and beyond.

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.