Question

Why do you have to give up more ownership to get outside investment if your business is risky?

Answer 1

When the business is risky, it is difficult to raise funds through debt financing. Creditors do not take the risk of lending money to a risky business. Therefore, when the business is risky the only way to get outside investment is through sale of equity shares. However, sale of equity shares dilutes the ownership of the business. The more equity shares you sell, lower the percentage of your ownerhsip in the business will become. Thus, in order to get outside investment for a risky business, you will have to give up a part of your ownership.