Equity OR Debt OR Soft Loan : What is better?

Hi Friends

One key discussion which every Startup founder has to make sometime soon or later is how to raise funds ? We all understand that except for few of Startups backed from day 1, others need to raise fund sometime, many of them within 1-2 years. A Big question is : Whether it is advisable to raise funds against Equity dilution ? Or go for Debt - convertible notes kind. Or plain loans from own ecosystem or financial institutions ?

Would be happy to know views here, especially any experiences as I am right now in same dillema !!

Hello Ravinder,

here my opinion (Disclaimer: As an investor you sure might think i’m biased). :slight_smile:

Debt is challenging for early-stage startups given the lack of assets that can be used as collateral and the uncertainty of the entire business. The downside protection is limited or non-existent given the risk and lack of assets, while there is no upside for the issuer. Where it can get more interesting in terms of debt is Venture Debt and Convertible debt instruments (important to distinguish from convertible equity).

I understand that dilution is a concern for you as a founder. If it is avoidable and not adding value to your business, there is no reason to raise equity and get diluted.

Given that equity-style investments in early-stage tech companies are so prevalent, it makes sense look at the reasons why.

  • Risk reward profile works
  • Alignment of incentives
  • Shareholders can add value (especially that their incentives are aligned with yours)
  • Experience of stakeholders with equity investments

Also keep in mind, both parties need to say yes to an investment. You are not forced to take money from an investor. If you find the right equity investor, he can and will provide you with a lot more than the capital. He sits in the same boat and wants you to succeed, he not only has something to lose but everything to gain.

Thanks Daniel. Appreciate your views and advice.