What are the risks, advantages and disadvantages of equity financing?

Investors' acquisition of some shares in an enterprise will inevitably lead to the dilution of the control rights of the original shareholders of the enterprise, and may even lose the actual control rights.

2. Opportunity risk

Because enterprises choose equity financing, they may lose the opportunities that other financing methods may bring.

3. Operational risks

There are great differences between the founding shareholders and the investors in corporate strategy and management mode, which leads to difficulties in business decision-making. This risk is mainly reflected in the corporate governance institutions with the board of directors as the core of governance, and the investors' shareholders require the company to ensure that the investors occupy a certain seat on the company's board of directors.

Knowledge expansion

Advantages of equity financing:

1. Equity financing needs to establish a relatively perfect corporate governance structure. The corporate governance structure of a company is generally composed of shareholders' meeting, board of directors, board of supervisors and senior managers, which form multiple risk constraints and rights balance mechanisms. It reduces the business risk of enterprises.

2. In modern financial theory, the securities market, also known as the open market, refers to the trading of standardized financial products in a wide range of institutionalized trading places under certain market access, information disclosure, fair bidding and market supervision systems. The corresponding loan market, also known as the agreement market, means that in this market, the financing activities of both borrowers and borrowers are directly agreed. In financial transactions, people pay more attention to the openness and availability of information. Therefore, the securities market is superior to the loan market in terms of information openness and capital price competitiveness.

3. If the borrower occupies a large share in the ownership structure of the enterprise, the possibility of using enterprise loans to engage in high-risk investment and moral hazard will be greatly reduced. Because if you do this, the borrower will suffer huge losses, so the greater the net asset value of the borrower, the greater the motivation for the borrower to act according to the wishes and wishes of the lender, and the less likely the bank will default and lose its debts.