Equity Finance: The Complete UK Guide for Businesses and Investors

As a specialist corporate solicitor who has guided hundreds of UK businesses through equity fundraisers, M&A transactions, and corporate restructurings, I understand that equity finance can seem complex. Whether you are a startup founder seeking your first investment round, an established business owner considering private equity, or an investor exploring opportunities, understanding how equity financing works under UK law is essential to making informed decisions.

In this comprehensive guide, I will explain equity finance in plain English, compare it with debt finance, and walk you through the key concepts of private equity and venture capital. By the end, you will have the knowledge you need to approach equity investments with confidence.

Chapter 1: What is Equity Finance?

Equity Finance Explained

At its core, equity finance involves raising capital by selling shares in your company to investors. Equity funding is a method used by companies at various stages—such as seed, Series A, B, and C rounds—to secure investment for growth and development. Unlike debt finance (such as bank loans), equity financing does not require repayment of the invested amount. Instead, investors receive an ownership stake in the business and share in its future profits and growth.

Under the Companies Act 2006, the primary legislation governing UK limited companies, shares represent units of ownership in a limited company. When a company issues new shares to raise equity finance, it must comply with specific legal requirements regarding share allotment, share capital, and shareholder rights. New shares can also be issued to existing shareholders as a way to raise additional capital while maintaining the current ownership structure. The Act requires that all shares in a limited company must have a fixed nominal value and that the company maintains accurate records of share ownership (Companies Act 2006, Part 17).

For a deeper understanding of how share capital works, including concepts like nominal value and share premium, I recommend reading my guide on Share Capital Explained. Nonetheless, this aspect is less important in the blog because corporate compliance will be handled by your solicitor. Instead, let’s focus on understanding the different ways a company can raise money using equity (shares), so that you can determine which is best for you.

Types of Investors in Equity Finance

Equity finance attracts a diverse range of investors, each bringing their own approach, resources, and expectations to the table. Understanding the different types of equity investors is crucial for businesses looking to raise capital, as each group offers unique advantages and may be suited to different stages of a company’s growth. Because investors are permanent (albeit they may sell their shares to someone else in the future), it’s important that you carefully consider who becomes your business partner.

1. Angel Investors Angel investors are typically high-net-worth individuals who invest their own money in early stage companies and startups. They often provide not just capital, but also valuable mentorship, industry connections, and operational expertise. Angel investors are usually willing to take higher risks in exchange for a significant equity stake, and are often the first external investors in a business, especially during the pre-seed or seed stage.

2. Venture Capitalists and Venture Capital Firms Venture capitalists (VCs) are professional investors who manage venture capital funds, pooling money from institutional investors, wealthy individuals, and sometimes family offices. Venture capital firms focus on high-growth, early stage companies with the potential for rapid revenue growth and market expansion. VC investments are typically structured in funding rounds (Series A, B, C, etc.), and venture capitalists invest in exchange for a minority equity stake, often taking an active role in guiding the company’s strategy and governance.

In other words, VCs buy minority stakes in growing companies using other people’s money. They exit their investment when the company is sold to a Private Equity Firm, or when the company IPOs.

3. Private Equity Firms and Private Equity Funds Private equity firms manage large pools of capital from institutional investors such as pension funds, insurance companies, and sovereign wealth funds. These firms typically invest in more established companies, often through private equity funds, and may acquire controlling or significant minority stakes. Private equity investors bring substantial capital, strategic guidance, and operational expertise, aiming to drive growth and improve profitability before exiting through a sale or initial public offering (IPO).

In other words, PE firms often buy more established businesses try to increase their value even more.

4. Institutional Investors Institutional investors include pension funds, insurance companies, endowments, and investment banks. These entities often invest indirectly in private companies through private equity funds, venture capital funds, or other capital firms. Their involvement brings credibility and substantial capital to a business, and they are typically focused on long-term returns and risk management.

5. Equity Crowdfunding and Retail Investors Equity crowdfunding platforms allow a large number of retail (normal people) investors to invest smaller amounts in exchange for an equity stake in a company. This approach is increasingly popular among new companies and startups looking to raise money from a broad base of supporters. While individual investments may be modest, the collective capital raised can be significant, and crowdfunding can also help attract investors and build a loyal customer base.

6. Family Offices and Wealthy Individuals Family offices manage the wealth of high-net-worth families and often invest directly in private companies, either alone or alongside other investors. These investors can offer flexible investment strategies and long-term support, making them attractive partners for businesses seeking patient capital.

Each type of equity investor has its own investment strategy, risk appetite, and expectations regarding involvement and returns. Choosing the right investor for your business can have a significant impact on your company’s future growth, governance, and ability to raise additional capital down the line.

Equity Finance vs Debt Finance

One of the most common questions I receive from business owners is whether they should pursue equity finance vs debt finance. The answer depends on your business circumstances, growth objectives, risk appetite, and personal preference. Here is a comparison to help you understand the key differences:

Many businesses use a combination of both equity and debt financing to optimise their capital structure. For startups without significant assets or trading history, equity financing is often the only viable option to secure investment.

Types of Shares in Equity Financing

When raising equity finance, companies can issue different classes of shares, each with distinct rights and characteristics:

•       Ordinary Shares: The most standard type, carrying voting rights and entitlement to dividends after preference shareholders.

•       Preference Shares: Carrying priority rights to dividends and capital on winding up. I explain these in detail in my guide on Preference Shares, but usually do not have any voting rights.

•       Convertible Shares: Shares that can convert into ordinary shares under specified conditions, popular with venture capital investors.

Government Support: SEIS and EIS

The UK Government offers significant tax incentives to encourage investment in early-stage businesses through two main schemes:

Seed Enterprise Investment Scheme (SEIS): Designed for very early-stage startups, SEIS allows companies to raise up to £250,000 while offering investors up to 50% income tax relief on their investment. Friends and family are often key sources of early-stage funding for companies using SEIS, providing capital in exchange for equity. To qualify for SEIS, companies must not exceed a total assets threshold of £200,000.

Enterprise Investment Scheme (EIS): For more established businesses, EIS allows companies to raise up to £5 million per year (and £12 million lifetime) while offering investors 30% income tax relief. Companies must not exceed a total assets threshold of £15 million to be eligible for EIS. The British Business Bank reports that EIS remains a significant source of capital for growing businesses (EIS Guide).

PRO TIP: If you are looking to raise equity finance, you should certainly look to secured advanced assurance from HMRC. In short, this is a confirmation from HMRC that the money investors give your business will qualify for the tax relief. If you can show this to investors, they are much more likely to invest in your business because you also lower their financial risk. For example, if an individual invests £100,000 in your SEIS-qualifying business, they get £50,000 in income tax relief. This means that, if they would have owed HMRC £200,000 in income tax, they now ‘only’ owe £150,000. Effectively, that means that they are only really risking 50% of the money they invest with your business, because the other 50% would have been paid (lost) to HMRC anyway.

Chapter 2: What is Private Equity?

Understanding Private Equity

Private equity refers to investment in companies that are not publicly traded on a stock exchange. Private equity firms raise capital from institutional investors (such as pension funds, insurance companies, and wealthy individuals) and deploy this capital to acquire stakes in private companies, with the aim of improving their performance and ultimately selling them at a profit. Private equity capital is provided to companies to support their growth and strategic objectives. Investment firms play a central role in the private equity ecosystem, managing funds and deploying capital into private companies.

According to the British Private Equity and Venture Capital Association (BVCA), total private equity and venture capital investment in UK businesses reached £29.4 billion in 2024, representing a 44% increase from the previous year. The industry now supports over 2.5 million jobs across the UK and contributes approximately 7% of GDP (BVCA Report 2024).

Types of Private Equity Investment

Private equity encompasses several investment strategies:

•       Leveraged Buyouts (LBOs): A leveraged buyout is the acquisition of a company using a combination of equity and significant amounts of borrowed money. The acquired company’s assets and cash flows often serve as collateral for the debt.

•       Growth Capital: Minority investments in relatively mature companies seeking capital to expand operations, enter new markets, or make strategic acquisitions without changing control.

•       Management Buyouts (MBOs): Transactions where a company’s existing management team acquires the business, typically with private equity backing.

•       Distressed Investments: Acquiring stakes in companies experiencing financial difficulties, with the aim of restructuring and returning them to profitability.

What Private Equity Investors Look For

When advising clients on private equity transactions, I emphasise that PE investors typically seek:

•       Strong Management Teams: Experienced leadership with a track record of execution is paramount.

•       Defensible Market Position: Businesses with competitive advantages, strong brands, or proprietary technology.

•       Growth Potential: Clear pathways to increase revenue and profitability.

•       Exit Opportunities: A realistic prospect of selling the investment within 3-7 years through trade sale, secondary buyout, or IPO.

For more detailed information on how private equity works in practice, see my guide on Essential Private Equity FAQs for Start-Ups.

The Private Equity Investment Process

A typical private equity investment follows these stages:

•       1. Deal Sourcing: Identifying potential investment opportunities through networks, advisers, or direct approaches.

•       2. Initial Evaluation: Preliminary assessment of the opportunity against investment criteria.

•       3. Due Diligence: Comprehensive investigation of the target company’s financial, legal, commercial, and operational aspects.

•       4. Negotiation and Documentation: Agreeing terms and preparing legal documentation, including share purchase agreements and shareholders’ agreements.

•       5. Completion: Finalising the transaction and transferring ownership.

•       6. Value Creation: Active involvement in improving the company’s performance. Private equity firms work closely with each portfolio company to drive operational improvements and growth.

•       7. Exit: Realising the investment through sale or listing.

On my YouTube channel, I discuss the practical aspects of business transactions, including director duties during M&A transactions, the importance of proper business structures, and how to approach acquisition warranties. These insights are particularly relevant when dealing with private equity investors. You can find these videos at @malcolmzoppi on YouTube.

Chapter 3: What is Venture Capital?

Understanding Venture Capital

Venture capital is a subset of private equity that specifically focuses on investing in early-stage, high-growth potential companies, particularly startups. Venture capital is a key funding source for emerging companies and startup companies with high growth potential. Unlike traditional private equity, which often involves established businesses, venture capital investors accept higher risk in exchange for the potential of exceptional returns.

According to BVCA research, venture capital investment in UK businesses reached £9 billion in 2024, a 12.5% increase from 2023. Venture capital funds are designed to support fund growth by investing in innovative businesses at various stages. The sector now supports over 378,000 jobs and backs more than 9,000 businesses across the country.

Stages of Venture Capital Investment

Venture capital funding typically occurs across distinct stages, representing different phases of equity funding for startups. Companies raise venture capital through successive funding rounds, each designed to support growth at specific milestones:

•       Pre-Seed: Very early funding, often from founders, friends, family, or angel investors, to develop an initial concept or prototype. A compelling business idea is essential at this stage to attract initial investment.

•       Seed: First significant external funding to prove the business model, build an initial team, and develop the product. SEIS-eligible companies often raise at this stage.

•       Series A: First institutional VC round, typically to scale the business after demonstrating product-market fit. At this stage, companies raise venture capital from professional investors to accelerate growth.

•       Series B and Beyond: Subsequent rounds to accelerate growth, expand internationally, or make strategic acquisitions.

How Venture Capital Differs from Private Equity

While both involve equity investments in private companies, key differences include:

•       Stage Focus: VC focuses on early-stage companies; PE typically invests in mature businesses.

•       Ownership Stake: VC investors, including VC firms, usually take minority positions in early-stage companies, providing both capital and strategic guidance; PE investors often acquire majority or controlling stakes.

•       Use of Leverage: PE transactions often involve significant debt; VC investments are typically pure equity.

•       Investment Horizon: VC holding periods can be longer (6-10 years) compared to PE (3-5 years).

Legal Considerations for Startups Raising VC

The following are usually topics of conversation during meetings with my clients who are looking to raise equity finance, and my general advice. To summarise, you should strongly consider adopting bespoke articles of association that create different classes of shares (ie alphabet shares) with different rights and restrictions on each.

•       Share Structure: Consider implementing different share classes. Convertible shares are particularly popular with VC investors, as I explain in my guide on Convertible Shares.

•       Shareholders’ Agreement and articles of association: These are a must. They are comprehensive constitutional documents governing the relationship between founders and investors, and usually include drag-along and tag-along rights, pre-emption rights, and specify matters that only the founders can vote on.

•       Vesting Provisions: Provisions that ensure key people earn their equity over time, protecting both founders and investors.

•       Anti-Dilution Protection: Mechanisms that protect investors if the company raises future funding at a lower valuation.

•       Board Composition: Agreeing who will sit on the board and what decisions require investor approval.

Understanding sweat equity is also crucial for founders who contribute their time and expertise in exchange for shares. I cover this in detail in my article on Sweat Equity: The Smart Way to Build Business Value.

The UK Startup and Investment Landscape

The UK remains Europe’s leading hub for venture capital investments and is also a top destination for venture funding, supporting innovation and high-growth sectors. Recent BVCA data shows that seed-stage deals experienced an 80% increase in investment levels during 2024, with cities like Cambridge, Oxford, Cardiff, and Glasgow emerging as significant centres for investment, particularly due to their academic spinouts.

AI continues to dominate investment activity, with UK AI startups securing £1.8 billion in VC funding in the first half of 2025 alone. Deep tech sectors including quantum computing, life sciences, and augmented reality are also attracting significant interest, supported by government initiatives such as the British Business Bank’s Growth Capital Initiative. For startups in these sectors, generating revenue is a key milestone for attracting further investment.

Financial institutions, including investment banks and other investors, play a significant role in supporting the UK startup ecosystem.

Conclusion: Navigating Equity Finance Successfully

Equity finance offers UK businesses a powerful route to growth capital, whether through venture capital for startups or private equity for established companies. Understanding the legal framework, investor expectations, and available government incentives is essential for both businesses seeking investment and investors looking for opportunities.

Key takeaways from this guide:

•       Equity financing trades ownership for capital without repayment obligations, unlike debt finance.

•       The Companies Act 2006 governs share allotments and shareholder rights in the UK.

•       SEIS and EIS offer significant tax advantages for investors in qualifying companies.

•       Private equity focuses on mature businesses; venture capital targets high-growth startups.

•       Proper legal structuring, including shareholders’ agreements and appropriate share classes, is essential.

Whether you are raising your first seed round, considering a management buyout, or exploring growth capital options, having the right legal guidance can make the difference between a successful transaction and costly mistakes.

How Zoppi & Co Can Help

At Zoppi & Co, we specialise in advising UK businesses on all aspects of corporate transactions, including equity fundraising, shareholders’ agreements, and M&A. If you are considering raising equity finance or have questions about structuring your investment round, contact our corporate law team for a free initial consultation.

We offer fixed-fee, transparent pricing and deliver work in days, not weeks. Our hands-on approach means you work directly with experienced solicitors who understand the commercial realities of your transaction.