How to choose debt or equity funding


1

Does anyone have a methodology or logic for deciding on debt vs equity financing?
Specifically, for a software startup, where a lot of development has been completed and product is ready to launch. Given the amount of effort invested it doesn't seem worth it to hand over 51% of the company to an investor (even for the cash). But even where the founder is able to get some amount of debt financing, that's a lot of risk to take on alone. Yet, some level of debt to get a few proven customers onboard would improve the deal that eventually may have to be made. To really get the product going would take significant funding beyond personal financing.

Funding

asked Apr 17 '12 at 06:22
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Patrick Ny
300 points
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1 Answer


2

The problem I see is debt service, and how it will effect your company's ability to grow. In a startup, so much money is required to be reinvested into the product during growth phases that traditional debt financing requires too much money to be taken out of the company in the form of debt service.

There's also the question of organic, verses accelerated growth. If your product generates enough revenues right off to pay you and your team, you can take your time building up your customer base, and growing the company with your current staff. But if it's a low margin product, or a product in beta that is not generating revenue, it's very difficult to even manage organic growth. Accelerated growth gives you a jumpstart on the market with enough funds to focus on growing and selling, and not having to worry about profitability right off.

Lastly, would you rather own 100% of a grape, or 49% of a watermelon? It sounds trite, but it's very true. (Note, no reputable angel investor would take that much of a company, regardless of the valuation)

answered Apr 17 '12 at 06:45
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Bwasson
1,162 points
  • Thanks, and I realize that some companies can get over-indebted, but so long as the debt is providing benefit and growth that supports the debt service, it is helping. You never get 100%. My concern is the amount of debt the founders would have to personally be liable for if the venture fails. But I don't want that to make it an equity decision at any price. I'm just looking for help on how to decide. – Patrick Ny 9 years ago

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