Are you looking to take on debt or to give up an equity stake in your business?

The word debt has always felt like a naughty word to me. It seems like a lifelong commitment of dread and overpayment that holds on to you like a leech. Okay, that sounds pretty dramatic now that I say it out loud. Today, we’re talking about business debt versus business equity. There’s different forms of debt but loans are the most common, at least in my world. I’m talking about loans from investors too, not just banks. On television shows like Shark Tank or Elevator Pitch, you don’t hear much about loan deals but they do exist. Equity is what gets people excited because there’s a lot of risk and a lot of reward based on one decision….Should I invest or not.

We’re going to talk about some of the pros and cons to equity versus debt from the standpoint of the Founder and the investor. Let’s start with the founder.

Founder’s Pros

First and foremost, equity is the runway to larger amounts of capital without immediately (or on a delayed schedule)having to pay back a debt. If you are clear that you want a certain dollar amount and will not need to ask for a lot more in the future, maybe a loan is for you but for the founders who go out to do a Series A, B, or C round of pitching to investors, they think they’re going to need larger amounts of capital in the future. If you’re opening up an ice cream shop or retail store, maybe equity isn’t for you but if you know that loads and loads of capital will be needed in the future, equity gives you that runway.

With the right investors, equity investments will provide greater opportunities of growth than just working with your team or co-founders. Think about Shark Tank. The exposure many people receive from Shark Tank whether good or bad tends to exponentially growth their business. For two reasons, more people are seeing your business and if you receive an investment from one or more of the sharks, their connections and desire to see you grow reaps major benefits. Now you don’t have to go on Shark Tank for those types of returns, investors (non-celebrity and celebrity) with business savvy and connections can deliver the same or similar results. It’s up to the founder to choose the right investor in this case.

Founder’s Cons

Most founders choose not to go the equity route because they want to keep their 100% ownership. My advice to you is to think holistically about your strategy to growth before making a decision. I’ve felt many times in my career that a founder would have done better off giving up equity for the sake of business growth but they did not feel comfortable answering to a 5% investor owner.

Investors have different benefits when choosing to be equity investors over providing loans to founders.

Investor’s Pros

Equity investors are looking for the potentially big returns that come with ownership. The big pay day is if the business goes IPO (or initial public offering) or it sells to a larger company. The pro is the long-term gains here. Additionally savvy business people not only have partial ownership in the company, but a seat at the table which allows them to support the founders in decisions and guide them towards success. If the investor is confident in their ability and the founder’s ability to grow a company, this make a great recipe for success.

Investor’s Cons

On the other end of choosing to be an equity investor, you’re not guaranteed a formal of payment. Payments are based on profits and are usually not steady. This is why you must not put all of your investments into equity business deals but diversity your portfolio so if you lose money or do not have a steady flow of cash coming from the business you invested in, you’re not struggling financially. The reality is business fail and some founders have been known to over promise or simply lie to gain investment capital.

Founders, when looking to receive a loan or equity, once again, think strategically of how you want grow your business. There’s not generally a wrong answer to taking on equity partners versus taking on debt. You must choose what’s right for you. Check out the Financials Chapter of my book After the Pitch to see more pros and cons related to debt versus equity. What is right for you?

That’s all for today. I’m Adrian T. Marable, your host.

Until next time and remember, giving up 90% ownership in a billion dollar company is better than keeping 100% of a company worth nothing.