Equity financing involves selling a portion of ownership in a company in exchange for capital. Unlike debt, equity investors do not receive fixed payments; their returns are tied to the performance of the business, realised through dividends, secondary sales, or an exit event such as an IPO or trade sale.
Equity financing is the dominant capital structure for early-stage and high-growth companies where cash flows are insufficient to service debt. In private markets, equity is typically structured as common stock for founders and employees, and preferred stock with protective provisions for institutional investors.