Equity financing means selling a piece of your company to raise money. Instead of borrowing (debt), you give investors ownership (equity) in exchange for capital. Startups sell equity to venture capitalists. Public companies issue new shares through follow-on offerings. The investor becomes a co-owner, sharing in both profits and risks.
Advantages: no mandatory repayment, no interest burden, and no bankruptcy risk from missed payments. If the company fails, equity investors lose their investment — the company does not owe them anything. Disadvantages: ownership dilution (existing shareholders own a smaller percentage), and equity is more expensive than debt (investors demand higher returns because they bear more risk).
The cost of equity (what investors expect to earn) is typically 10-15% — much higher than debt costs of 4-8%. This is because equity holders are last in line during liquidation. Tesla raised $12 billion through equity offerings between 2010-2020 to fund its growth. The trade-off between equity and debt financing is the fundamental capital structure decision every company faces.