Why startups choose equity financing

Early-stage companies face a strategic trade-off: They’re rich in ideas and future potential but poor in cash and borrowing capacity. These companies typically operate at a loss while developing products and building teams, making traditional debt impractical and potentially growth-constraining.

Beyond flexible capital, equity investors typically provide industry expertise, access to their networks, strategic guidance and mentoring. “It’s so much more than just getting funding,” Ceja said. 

Equity financing at different business stages

Startup equity financing usually evolves through different stages of growth. All approaches involve the same basic mechanism—selling ownership stakes for capital. What changes is the investment size, investor sophistication and expectations as your startup matures. “Each stage is setting you up for the next,” Ceja explains.

• Angel/pre-seed funding: The earliest stage happens when you’re moving from idea to concept, building your minimum viable product (MVP) before raising institutional funding. Angel investors are typically successful investors or entrepreneurs who write smaller checks ($25,000-$100,000) and provide hands-on mentorship.
• Seed stage funding: At the seed level, investors typically expect proofs of concept and indication of market traction. Seed round investments generally range from $2 million to $3 million per investor from venture capital firms, institutional angel funds or equity crowdfunding platforms.
• Series A and beyond: The jump to Series A is noticeable in both size and scrutiny. Investors expect demonstrated product-market fit and material revenue. Series A is typically led by institutional venture capital firms, with later rounds sometimes including nontraditional investors like asset managers, sovereign wealth funds and private equity firms. 

Benefits of equity financing

Understanding the benefits and drawbacks of equity financing helps founders make informed funding decisions:

• Capital without debt burden: Equity financing requires no monthly payments and doesn’t add default risk to a startup’s often-delicate cash management strategy. This financial flexibility allows founders to focus on growth rather than on debt service.
• Strategic partnerships and expertise: The money aspect is important, Ceja notes, but the expertise and advisory piece is just as valuable. “Founders want to think through how else investors can add value. It can be through industry expertise, network effects or other connections that might be helpful over the long run.”
• Network access and validation: Investor relationships often come with introductions to customers and suppliers, new avenues for talent acquisition, future funding connections and other support systems. When those investors are already respected in business circles, their ownership stake in your company reflects well for customers, partners and future investors.

Executing your fundraising strategy

1. Prep and plan on a realistic timeline. First, startups must identify the total target amount they’re raising, with the goal of having enough funds to reach the next significant milestone. Funding rounds timing has become more variable in recent years, Ceja said. “For example, if you’re hiring a couple of people and it’s going to cost you $40,000 a month, you multiply that $40K over your projected runway—which recent PitchBook data shows can range from 12 to 24 months between rounds depending on your stage and specific circumstances,” she said. A good milestone should be clearly measurable—not vague or aspirational.
2. Get organized. “You can’t just say you’re fundraising—you actually have to treat it similarly to how you would run a sales process,” Ceja said, detailing different stages of the fundraising process. “You’re taking investors in, you’re having meetings, you’re actually moving them through this funnel, which includes due diligence, negotiations, etc.”
3. Keep an eye on the clock. One of the biggest pitfalls faced by early-stage startups comes down to timing, Ceja said. “Without a sense of urgency, investors can take too long and sometimes drag on so that you run out of capital.”

Understanding valuation and dilution

Valuation and dilution represent two of the most crucial—and often misunderstood—aspects of equity financing. Many founders focus primarily on the amount of money they’re raising without fully grasping how each round affects total valuation, their ownership and control over time.

Growing company value

One of the most common concerns founders express about equity financing centers on giving up ownership and value in their company. While this concern is understandable, Ceja offers a helpful framework for thinking about dilution strategically.

“At every stage when you sell equity, you’re going to be selling a portion of the equity and future returns,” she said. “However, you want to be thinking about it as not only just taking a piece of your pie, but rather enlarging the pie.”

The plan for a founder is to make enough progress with their startup that each subsequent round of financing raises at a higher valuation, increasing the size of the pie. Well-negotiated successful equity rounds increase the company’s total value by more than the percentage of ownership being sold. “While you as a founder may end up with sharing more of the pie, it’s better to own a smaller slice of a very large pie than a larger slice of a smaller one,” Ceja said.

Dilution doesn’t happen all at once; rather, it accumulates across funding rounds as companies scale. “Each round dilutes founders further,” Ceja said. Market data from PitchBook shows Series A rounds involve 20% -25% dilution, with later rounds often taking smaller percentages as company valuations increase.

Equity financing governance and control considerations

Equity financing affects more than just ownership percentages—it also influences control and decision-making authority within your company. Lead investors often expect one or more seats on a company’s board of directors. Depending on how many board seats exist, control of enough board seats can shift control of the overall company.

Metrics investors want to see

Depending on the stage of the startup, investors expect to see indicators that prove a startup’s viability and growth potential. Understanding which metrics matter most can help founders prepare more effectively for investor discussions.

Investors typically focus on a core set of metrics that reflect a company’s financial performance:

• Revenue targets: Whether you’re generating recurring revenue, transaction-based income or pursuing other monetization strategies, revenue metrics around run rate, growth and pipeline help investors understand the effectiveness of a startup’s sales strategy and market adoption.
• Burn rate: Monthly cash expenditure shows investors how effectively cash is being spent to grow, how efficiently operations are being managed and how long a runway remains.
• Path to break-even: Even if profitability remains years away, demonstrating a clear ability to get there under reasonable assumptions shows consideration of unit economics and scalability.

For many startups, especially in consumer markets or B2B software, customer-related metrics can prove more important than early revenue numbers, Ceja said.

• Customer acquisition cost (CAC): This reveals how efficiently your marketing and sales efforts convert prospects into paying customers.
• User acquisition targets: For companies prioritizing user growth over immediate monetization, demonstrating consistent user acquisition provides evidence of market demand and product-market fit.

How J.P. Morgan supports startup equity financing

J.P. Morgan Commercial Banking provides specialized support for startup equity financing, from pre-seed planning through Series A and beyond. Our Startup Banking team understands the unique challenges of fundraising and offers treasury management, banking relationships and strategic guidance tailored to high-growth companies.

Learn more about J.P. Morgan’s Startup Banking solutions or contact a Startup Banking specialist to discuss your company’s equity financing strategy.