What SaaS Equity Financing Is and How It Works

5-Minute Read

What is SaaS Equity Financing?

saas equitySaaS equity financing is receiving capital in exchange for ownership in a company. A number of options are available when it comes to equity financing, such as obtaining funding through an angel investor (a private individual willing to invest in a business), a venture capital firm (investment in a company that has potential for long-term growth), or private equity (investment in a company that’s not publicly listed).

The amount of ownership given to the investor is determined by what stage the company is at in terms of investment (series A, B, etc.), the performance of the company, and the amount of capital that the company is looking to receive.

SaaS equity financing is typically sought out when a company has been in operation for some time and has built a stable foundation, a key component of which is its monthly recurring revenue (MRR) or annual recurring revenue (ARR). Another financial consideration is the amount of churn a company experiences on a monthly basis, as this is an indicator of its ability to build and maintain relationships — or lose them. Low churn and high MRR/ARR is desirable.

A company looking for funding earlier on to stay in operation typically would not explore equity financing, as the level of investment is much higher. The process for obtaining SaaS equity financing is also much longer, sometimes lasting as long as six months or more. Often, this is where venture debt financing comes in, which is loan-based financing that is repaid using profits or another monthly payment arrangement. Debt financing is better utilized for sales and marketing acceleration, as it features a lower long-term cost to the business while enabling them to grow faster. Explore an equity vs. debt capital scenario here.

Things to Consider with SaaS Equity Financing

It Will Dilute Your Ownership

Since one of the requirements for equity-based financing is giving up a portion of ownership in a company, those interested in exploring SaaS equity solutions must be prepared on two fronts. First is that the investor’s opinions, decisions, and overall more active level of involvement must be considered. The company will have an ownership stake in the business and will have an interest in ensuring the success of their investment.

As a result of this, new shares are often created, which naturally lowers the value of the company’s stock. While time and growth may remedy and even offset this, the amount and value of the stock owned by the founder won’t be as high as if the investment wasn’t taken in the first place. Owners considering SaaS equity investment must be prepared for this.

It Comes with Expertise and Connections

A key benefit of equity financing is that it brings the investor’s connections and expertise to the table. Venture capital and private equity firms have all manner of connections in their industry and within the industries of the companies they invest in, which can be extremely useful to an established SaaS company looking for partnerships, new sales opportunities, and more.

Keep in mind that the investor will also have a significant amount of experience in both the financial aspect of the investment arrangement as well as the business model of the company with which they’re working. Their knowledge will be incredibly useful to SaaS owners as they refine their platform, identify new markets to expand into and better compete in existing markets, and manage the operational and financial aspects of their business.

What to Look for in a SaaS Equity Investor

Speed

One of the most common downsides with equity investment is that it can take time to complete. As we discussed, a standard equity investment could take anywhere from several months to more than a year for more complex or sizeable investments. However, an ideal investor will have the process well-oiled and ready to go once interest has been expressed. River SaaS Capital has years of experience on the venture debt side, and because most of our equity requirements match our debt funding, we’re able to provide investment much faster.

Options

SaaS equity financing doesn’t have to be your only solution. In fact, many SaaS companies have a few arrangements for growth capital going at one time. The funding solution you choose depends on your short- and long-term goals. For example, say you already have equity investment but are looking to secure another round of funding at your next valuation. However, you still need to maintain operations and your growth efforts in the meantime. Venture debt financing is a great way to extend your runway as a bridge mechanism between raise rounds. And because River SaaS Capital is able to offer both options, you have the advantage of closing your bridge funding faster.

Partnership

It all comes down to relationships. The ideal investor — whether equity or debt — wants to be part of your growth journey and will take an active interest in doing so. The investor doesn’t need to have an ownership stake in the business in order to help it succeed. They will provide guidance and strategy as well as recommendations and insights to help you guide your organization toward success and make the most out of your investment. At River SaaS Capital, our investment team takes an active role in supporting our clients’ success.

Ready to Start Your SaaS Equity Journey?

River SaaS Capital is here to help you make your business and platform vision a reality. With both venture debt and SaaS equity options available, we are the ideal partner for SaaS companies looking for flexibility, support, and speed. Fill out the form below to start a conversation with our investment team about your business and goals.

Ready to Learn More?

Fill out the form below, and we’ll be in touch.