Understand the difference
Debt usually requires payments and compliance with contractual terms. Equity typically gives an investor an ownership interest with associated economic and governance rights. A financing package can contain both, and hybrid features such as warrants or conversion rights change the outcome beyond a simple interest-versus-shares comparison.
How to make the comparison
Use three scenarios: the business performs as expected, grows much faster, or needs more time. In each case, assess cash runway, total payments, founder ownership, control rights, and the ability to raise additional capital. A predictable asset investment and an uncertain research program may support very different funding choices.
The details that can change your decision
Debt can preserve ownership while increasing default risk. Equity can absorb a longer development period while sharing future value and potentially changing governance. Neither is free money. Include legal and transaction costs, personal guarantees where relevant, and the investor’s or lender’s ongoing rights. A staged combination may fit better than financing the entire journey with one instrument.
Your next-step checklist
- Cash runway in three performance scenarios
- Ownership and governance outcomes
- Future financing and exit implications
- Fees, guarantees, and hybrid rights
Crack this combination.
What should an equity comparison include besides the amount raised?
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Sources & further reading
This file draws on the following references. Product availability and requirements must be confirmed with the provider.
Levr: debt, equity, and bootstrappingLevr: understanding venture debtLevr: reviewing a debt term sheet