Liza Leshchynska | Queen’s Venture Law Society | February 2022

Editors: Nicolas Guevara-Mann & Mikela Page


Considering ways to finance your small business? Equity-based financing might be an attractive choice. Equity-based financing is the process of raising capital through the exchange of shares in your company in return for a lump sum investment.[1] The equity financing industry consists of diverse investors each of whom may invest at different levels of company growth and size. This article helps explain the complexities of the industry and helps you understand what kind of equity investment and investor may be ideal for your business.

Key Sources of Equity Investment in Canada:

  • Accelerators: In addition to providing small equity investments, these collaborative non-profits run fixed-term educational programs for founders.[2] Founders go through product and customer development quickly with the help of business and technical mentors. Founders are also exposed to other early-stage investors through an accelerator’s network, providing an opportunity to create connections for future financing rounds.[3]
  • Angel Investors: These wealthy individuals invest in early-stage start-ups. Because an early-stage start-up has very few metrics to back its product/idea success, angel investors often look to the team as a signal of the founder’s operational capabilities to grow the company and dedication to a specific industry.[4]
  • Venture Capital (VC) Funds: These are organized funds that make investments in start-ups based on specific criteria such as geography, industry, and the current stage of the company (for example, seed-stage Canadian AI software companies). VC Funds invest in a company if they expect that it will either grow very quickly, get acquired or go public. Consequently, VC Funds favour preferred shares in exchange for their investment, as these are paid out first in a liquidation event.[5] Many VC Funds focus on financial metrics and company-specific metrics to evaluate a company’s attractiveness, such as revenue and customer growth.[6]

Main Stages at which an Early-Stage Company may Seek Equity Financing:

Bootstrapping/Pre-seed Stage:

At this stage, founders have a specific concept in mind but an incomplete product. Companies seek financing to cover “start-up costs”: the cost to develop an initial product. This is usually the most difficult stage for companies to find equity financing because it entails the highest level of risk due to the lack of product-market validation. However, companies can find some equity financing through Angel investors, friends, or family members that will personally invest in the company.[7] Companies can also find capital through non-equity sources, such as grants, competitions, and incubators.

Seed Stage:

The seed stage is the earliest stage of the formal capital-raising process. Companies have validated their concept with key customers but have not yet achieved break-even.[8] Companies seek funding to better focus their marketing to target key customer segments and improve their product quality.[9] A seed round usually varies between $100k - $2 million in size, with about 10-25% of equity given to investors.[10] Early-stage VC Funds and Angel investors are the largest source of investment.[11]

Growth Stage:

The growth stage of funding encompasses companies at Series A, B, C, and higher stages. At these growth stages, a company is generating significant revenue and customer growth, and is either profitable or has a clear path to profitability. A company seeks capital for a variety of initiatives, such as expanding the team, exploring new revenue streams, pursuing strategic acquisitions or international expansion.[12] Venture Capital Funds and larger institutional investors are the primary investors at this stage.[13]

Other Important Considerations for Investment

After confirming what stage your company is currently in, you may also want to consider:

  • Investor Involvement: Some funders take a passive role, investing primarily to gain from the increase in company valuation. Other funders prefer to play an active role. An investor from the fund will typically join your company’s Board of Directors and participate in the company’s strategic decision-making. Depending on your preference, you can benefit from more autonomy or more investor expertise alongside the monetary investment.
  • Industry: You may find a fund that only invests in industry-specific companies. Some funds have a specific focus because their investors have expertise in that industry. In addition, some accelerators run programs for companies in high-growth industries. Depending on your industry, you may have an opportunity to join a special program with investment potential.

After looking at types of investors, stages of funding and other considerations, we hope this article helped demystify some of the complexities of equity financing. Ensure that you seek legal advice regarding relevant security law considerations before planning any sort of equity financing. We hope that your small business is now in a better position to consider whether equity financing is appropriate for you.

Photo by Rafael Classen from Pexels

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[1] Business Development Bank of Canada, “Equity financing” (last visited 9 November 2020), online: Business Development Bank of Canada <…;.

[2] Sean Peek, “Could a Startup Incubator Benefit Your Business?” (29 July 2019), online (blog): U.S. Chamber of Commerce <;.

[3] Ian Hathaway, “What Startup Accelerators Really Do”, Harvard Business Review (1 March 2016), online: <;.

[4] Nicole Torres, “What Angel Investors Value Most When Choosing What to Fund”, Harvard Business Review (6 August 2015), online: <…;.

[5] Practical Law Canada Corporate & Securities, “Preferred Shares in Private Equity Transactions” (last visited 9 November 2020), online: Thomson Reuters Practical Law <;.

[6] Richard Harroch and Larry Kane, “15 Key Questions Venture Capitalists Will Ask Before Investing In Your Startup” (13 April 2019), online (blog): Forbes <…;.

[7] Madison Park Group, “Guide to Venture Capital” (last visited 9 November 2020) at 3, online (pdf): Madison Park Group <;.

[8] Ibid.

[9] Corporate Finance Institute, “Business Life Cycle” (last visited 9 November 2020), online: Corporate Finance Institute <…;.

[10] Apogee Accelerator Group, “Series A, B, and C: The Difference Between Each Funding Series” (last visited 9 November 2020), online (blog): Apogee Accelerator Group <…;.

[11] Supra note 2.

[12] Supra note 5.

[13] Supra note 2.