How Can Equity Debt Prevent Me From Raising Money?

Deciding on which route to take

It is usually the case that founders have a choice on whether to go the debt or equity financing route. That choice often depends upon such things as:

• Which type of funding source is most easily accessible to you?
• What is your current cash flow situation?
• How important is it for you as a founder(s) to maintain control of your company?

Founders will come across the term “debt-to-equity ratio”. This shows how much of a company’s financing is respectively provided by debt and equity.

Examples of how equity financing and debt financing work

While both equity financing and debt financing can give founders the funding required there are stark differences in the potential outcome.

Here are examples of both fundraising routes with upsides and downsides of each:

Equity Financing

When a founder opts for equity financing this involves giving up (selling) a portion of their company’s equity in return for needed capital.

As an example, a founder needs to raise funds to grow their business. To do that the founder makes the decision to give up 10% ownership of their company to an investor in return for the agreed amount of funding.

Once that deal is sealed the investor is now the owner of 10% of your business. They also have a say in all of the business decisions made going forward.

The main advantages of equity financing are….

By going this route founders have no obligation to repay the money an investor puts into the company. It stands to reason that the founder wants their company to be successful. They also want to provide all equity investors with good returns on their investments.

But whether this is achieved or not the funds given by an investor do not require any set payments or interest charges. As will be seen in the next section, this is not the case with debt financing.

Founders offer up a percentage of company ownership to investors without any additional financial burden to their company. Because there are no monthly/quarterly payments attached to equity finance it means a startup has more funds available to use to grow their company.

All sounds good? Perhaps, but founders need to be aware that there are….

Downsides to equity financing….

The downside to equity financing can be quite significant. As explained, to gain investor funding a founder is giving away a percentage of their company. Once that is agreed founders must be prepared to share any profits with the equity investor.

Founders also have to understand that there will be a need to consult with their new equity investor partners before making any decisions that will affect the company.