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Selling Equity: Venture Funding vs M&A

Posted on by Confiex Team

Last updated on June 23rd, 2023 at 08:20 am

INTRODUCTION

All companies big or small face a paucity of funds to meet their expansion goals. Sometimes the owners decide to book profits on their investments in a company to diversify their business by either selling off the entire company or a part of it. When selling equity, the owners have a lot of choices – private equity, venture funding, M&A. Which choice they should consider depends upon their current position and future vision.

An M&A deal involves the company either merging with or absorbing another company.  This kind of transaction naturally transforms the company’s ownership and leadership structure. The acquired company may either keep it’s identity and independence or lose it’s brand or in some cases serve a completely new function. Similarly the founders and executive team may leave or stay back even after the M&A deal. In mergers two companies may mutually agree to merge as equals to grow their market share or leverage their respective knowledge and resources. While in an acquisition, generally a larger company acquires a smaller company. This could be for it’s intellectual property, innovative work or quite simply for market share if it is a direct competitor.

Venture Funding is quite different from an M&A, especially in terms of how it’s funding changes the identity of the target firm. The funding for this type of financing usually comes from wealthy investors, investment banks, and specialized VC funds.  However VC funding does not necessarily be financial investment, it can also be offered via technical or managerial expertise. A venture capital investor (ideally) does not seek to take control of firm in which the investment is made. Venture capital takes a sizeable but minority equity interest with the hope that the investment will yield very high returns in the future. This money is paid into the firm to fund its operations, rather than going to the owners as you would see in the case of an acquisition. Generally, the owner and executive team will keep running the company.

If you need to keep full control of your business, from marketing strategy to budgetary decisions, then VC funding is a better option as that model will often better respect the autonomy of the target firm. The key difference between an M&A and a VC funding is that the VC investor is betting on your company, not buying you out. M&A deals live or die by their success or failure in creating synergies that causes them to achieve output or efficiency that is greater than their sum as individuals. When seeking synergistic effects, companies will almost always go the M&A route. 

Your exit plan decides how you prefer to sell your equity, specifically how much of it you sell and whether you personally get paid. If you want to be leading the company in the long run then it’s not a good idea to get acquired. If you’re not ready to divest yourself and take profits, and if your company is young and growing fast, an acquisition or merger is unlikely to serve your interests. Then for you VC funding is a better option. Your company gets funded in time for you to put that money to work and take things to the next level.  But if you ready to walk away or your company’s growth is slowing, M&A may present an attractive, lucrative way to take profits on what you’ve built. 

The right way to Sell Equitydepends on the unique circumstances and objectives of every boardroom and usually requires a thorough soul-searching and careful planning.

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Confiex Team

The Confiex team specializes in providing premium virtual data room solutions tailored for businesses. With their vast experience in working with document sharing platforms, they have been actively supporting the Virtual Data Room community since 2015 by offering valuable information to users free of charge.

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