Growth Equity vs. Control Equity: Know the Difference

If you follow the mergers and acquisitions space, you’ve likely come across both “growth equity” and “control equity” in conversations about business financing. These two terms might sound similar on the surface—both involve infusing capital into a company—but there’s a big difference in how each approach can shape a target company’s future.

Whether you’re a founder looking for strategic funding, an investor weighing investment options, or part of a mergers and acquisitions team evaluating potential deals, it helps to know exactly what each type of investment entails.

Understanding Growth Equity

Growth equity (sometimes called “growth capital”) is a type of private equity investment usually geared toward relatively established companies looking to expand. Often, these companies have proven business models, stable revenue streams, and strong market traction—but they need more capital to level up.

Typical Scenario

Let’s say you’re running a technology startup that’s moved past the early seed stages. You’ve built a dependable clientele and are generating steady revenue, but you know taking your product suite national or international will require a significant infusion of funds—perhaps for new hires, marketing, or research and development. Instead of risking heavy debt or taking on a large controlling investor, you might seek growth equity investors.

Amount of Ownership and Influence

Growth equity investors take a minority stake, meaning they’ll own a slice of the business but won’t hold overall control. The founding team or existing leaders usually continue to run day-to-day operations. As a founder or majority stakeholder, you’ll still decide on key strategic directions, though the investor will expect a seat at the table—and some say—in major decisions.

Use of Funds

This type of investment is frequently used for scaling strategies, like expanding product lines, launching into new markets, hiring top-tier talent, or acquiring smaller competitors to speed up growth. It’s often not about fixing a struggling company; instead, it’s about propelling a promising business toward bigger opportunities.

Time Horizon and Returns

Growth equity deals typically have a medium-term horizon—somewhere around three to seven years. The goal is to help the company become significantly more valuable during that period, at which point the investors will typically exit through a sale, IPO, or secondary transaction.

Understanding Control Equity

On the flip side, control equity involves a majority stake—usually well over half of the shares—or complete ownership of a target company. This approach is more common when large private equity firms, holding companies, or other strategic buyers want to direct strategy without interference.

Typical Scenario

Imagine a family-owned manufacturing business that’s been around for generations. The next group of owners might not be interested in running it themselves—or the company might need a major turnaround. A private equity firm that specializes in control deals might swoop in, buy a controlling stake, and bring in new leadership or direction.

Ownership and Influence

With control equity, the new majority owner gets the final word on nearly every major decision—ranging from daily operational changes to who sits in the CEO’s chair. This is often seen in leveraged buyouts (LBOs), where a firm uses a combination of its own funds and borrowed money (leverage) to acquire a controlling share in a target company.

Use of Funds

Control equity deals can be about expansion—but they often also focus on restructuring a struggling business or one that’s not quite reaching its potential. New ownership might optimize operations, cut costs, sell off non-core segments, and reshape the entire strategic approach. The controlling investor typically enforces these changes from the top down to enhance profitability.

Time Horizon and Returns

Control investors also look to exit at a profit, typically within a comparable timeframe of about three to seven years, though this can vary. The difference is in the level of direct oversight they’re willing (and able) to exert during that period.

Key Differences in Practice

So, how do these two approaches differ when you’re facing real-life business decisions?

Degree of Control and Governance

• Growth Equity: You maintain most of the decision-making power. Yes, the investor has input and might negotiate certain protective terms, but you don’t cede the steering wheel to them.
• Control Equity: The new owner can dramatically reshape the company. If you’re the original founder, you’ll likely see changes in leadership, structure, or even the overall strategy.

Risk, Rewards, and Personal Stakes

• Growth Equity: There’s less immediate risk in terms of losing control. However, the business’s overall returns might be somewhat lower than in a more aggressive buyout scenario. The growth equity investor’s success is tightly linked to your management team’s success.
• Control Equity: While high risk can sometimes mean high reward, you relinquish operational control. If you’re an owner who wants a clean exit and is open to stepping away, that might be acceptable. But if you wish to stay involved, control equity could be less appealing.

The “Why” of the Deal

• Growth Equity: Typically, the “why” centers on acceleration—launching new lines of business, speeding up expansion, or adding advanced tech solutions. The business is doing well, but it’s hungry for the next level.
• Control Equity: Often the “why” is about transformation. Maybe the business is undervalued, has outdated processes, or is just ripe for a strategic overhaul. A control investor steps in with the goal of reshaping it entirely, often aiming to exit at a higher valuation once the business is back on track or positioned for major growth.

Impact on Culture

• Growth Equity: The day-to-day culture may remain relatively intact, especially if the investor is hands-off. They’ll likely partner with you rather than dominate.
• Control Equity: Expect bigger cultural adjustments. The controlling owner might bring in a new management philosophy, replace executives, or shift how teams work together.

Pros and Cons to Weigh Carefully

Pros of Growth Equity

• Retain Leadership: If you’re a founder or longtime executive, you can usually continue leading the company without dramatically changing the structure.
• Strategic Partner: You gain a partner with deep networks, which can speed up growth, help in negotiations, and open doors to new markets.
• Less Operational Disruption: Because you remain in control, you can integrate the investor’s insights diplomatically and at your own pace.

Cons of Growth Equity

• Partial Dilution: You do give away a portion of your ownership. Shareholding might decrease, although it’s less dramatic than in a full buyout.
• Ongoing Investor Expectations: Even minority investors often want ongoing updates—sometimes including seats on the board, veto rights over major decisions, or specific financial milestones.

Pros of Control Equity

• Potential for Large Influx of Capital: Acquiring a majority stake often means injecting significant funds into the business.
• Quick Overhaul Possible: When an operator or private equity firm takes over, it can implement sweeping changes quickly—potentially turning a stagnant business into a thriving one.
• Clear Exit Strategy: Control investments often come with a well-defined exit plan, which can be beneficial if you want to bow out gracefully.

Cons of Control Equity

• Loss of Ownership and Direction: You might completely lose control of the strategic direction and day-to-day operations.
• Cultural Upheaval: Major changes can unsettle employees if the new owner institutes cost-cutting measures, leadership changes, or new corporate policies.
• Possible Misaligned Goals: The controlling party might not always share the same vision for the company, focusing more on short-term returns than your original long-term goals.

Which One Fits Your Business — or Your Portfolio?

Determining which form of equity fits your situation begins with asking yourself—and any other stakeholders—some key questions:

• Do you want or need to maintain a leadership role in the company?
• Is the business stable and profitable enough to succeed with additional capital, or does it need revitalization from the ground up?
• Are you comfortable with an investor having veto power or a say in strategic decisions if they’re a minority holder, or do you prefer immediate changes from a controlling new owner?
• What’s your exit horizon, and do you have a personal desire to see the business continue under your guidance, or do you prefer stepping away entirely?

 

For business owners who have a steady ship, primarily want to accelerate growth, and maintain their seat at the helm, growth equity can be an appealing route. On the other hand, founders looking to transition out or companies that need a more dramatic strategic pivot might be open to a control equity deal.

Bridging the Gap in M&A

When it’s time to explore growth equity or control equity deals in a mergers and acquisitions context, keep two points in mind:

Thorough Due Diligence

Whether you’re an owner or an investor, you’ll want to dive deep into the company’s financials, market position, and operational structure. For a growth equity deal, it’s crucial to confirm that there’s a real pathway to scale. For a control equity deal, the potential for a meaningful turnaround or operational refinement is a priority.

Alignment of Interests

More often than not, deals begin smoothly but unravel if the parties don’t share a common vision. Whether minority or majority, equity providers need clarity on strategy, governance, reporting requirements, and timelines. Entrepreneurs must be equally transparent—especially if they want to stay in the driver’s seat.