June 24, 2024

What is an equity investment and why it's important to keep equity in your ecommerce business

Kristen Campbell

Why is equity so important, especially for ecommerce business owners? Equity is important for ecommerce business models of all kinds. Business equity can be defined as the total value of the enterprise: the total assets owned by the business, minus any liabilities. Depending on the company’s structure, a founder can own all, or part, of the equity value. 

Shares or stock options are the most common method of representing this equity, or ownership, stake in a company. Founders of an ecommerce business start off with 100% ownership over their business. Later, a slice of this equity can be sold in exchange for funding, or as an incentive as part of hiring employees.

What is investment equity for ecommerce business owners?

Equity entitles the owners to a portion of the profits as well as gives them a say in the decision making of the company. Common shares are voting (or non-voting, in some cases) shares of a business and give owners both a stake in the profits and a vote on what decisions are made. Common shares are the most common form of ownership in an ecommerce business, but it’s also possible for businesses to issue preferred shares. Preferred shares do not have voting rights but pay a fixed dividend amount at a certain times, similar to a bond. 

The distinction between preferred shares and common shares, as well as the voting rights inherent in common shares, is something ecommerce business owners should keep in mind. Voting rights for common shareholders include the right to help decide on: 

  • Whether or not to remove directors from the company
  • Who to nominate or elect as a director of the company
  • Whether or not to purchase significant assets (such as equipment or property) for the company
  • Whether or not to dissolve, split, merge, convert or otherwise significantly change aspects of the company 
  • Whether or not to approve increases or incentives related to compensation or executive pay (‘say on pay’)

Common shareholders effectively own a piece of the company, and can expect to receive dividends when announced, take part in the annual meeting of shareholders, and sell their shares when they choose. If the company is going to be sold, equity also means the founder can claim their piece of the sale price. 

Why should ecommerce business owners hold on to equity? 

Equity should not be given away lightly. With only a fixed amount of the company to sell, equity ownership is possibly the most valuable asset ecommerce businesses have. However, debt financing isn’t always feasible in terms of cost, and equity funding can have a number of additional benefits as well. 

In general, raising money for an ecommerce company can be a chance to take the company to the next stage. The additional funds can also come from experienced investors with good advice for future growth. However, taking this money comes at the expense of future control – something early stage founders should think carefully about letting go.

Without equity, founders might be forced to use more challenging methods to take back their board seats or voting rights, and can even lose control of the business’ strategic direction

Ecommerce startups with spiking sales that offer ‘something special’ in terms of product, brand or niche might benefit from equity funding, either now or later on. Ecommerce startups that are already making steady sales, and are looking to take their growth to the next level, might also consider an equity raise. 

What are some alternatives to selling equity in your ecommerce business?

Debt financing can be a challenge for ecommerce businesses because of unstable cash flows. Seasonality is inherent in many ecommerce industries, thanks to big shopping days like Black Friday/Cyber Monday, summer seasonality trends, Prime Day, or the leadup to Christmas. Seasonality can also make it harder to repay debt, since monthly or weekly repayments don’t stop outside of peak seasons when sales do. 

Thanks to this seasonality, it’s common for ecommerce founders to find other means of accessing capital. Generally, the rule of thumb is that founders should not take more money than they need to continue to grow, whether this money comes from equity investments, Invoice Funding, or from taking on debt, such as a Small Business Administration Loan. Some founders might use different methods for accessing funds or delay an equity raise until the company is more mature. These options can help ecommerce businesses meet cash flow needs without giving away ownership or taking on debt. 

Finding alternative methods to access working capital in earlier years allows founders to hang on to equity until they’re ready to share – giving ecommerce businesses the working capital they need, without giving away their share and control in their business.

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Kristen Campbell
Content Writer

Kristen is the co-founder and Director of Content at Skeleton Krew, a B2B marketing agency focused on growth in tech, software, and statups. She has written for a wide variety of companies in the fields of healthcare, banking, and technology. In her spare time, she enjoys writing stories, reading stories, and going on long walks (to think about her stories).