What we'll cover: Overview What is equity financing? What are the benefits of equity financing? What are the disadvantages of equity financing? What is debt financing? What are the benefits of debt financing? What are the disadvantages of debt financing? Is debt financing cheaper than equity financing? Are SAFE Notes and Convertible Notes debt or equity financing? How to make the equity financing process cheaper and quicker When your company raises capital, there are a few options that fall under the buckets of equity financing and debt financing. Many companies use a combination of both of these, but it’s important to note the advantages and disadvantages of each of these financing types. Equity financing happens through a priced round where a portion of the company’s equity is sold at a set price. For example, an owner gives up 10% of their company and sells it to an investor in return for capital. That investor now owns 10% of the company, and depending on the terms, may have input in business decisions moving forward. There are many advantages of equity financing, including: While there are benefits to equity financing, there are also disadvantages you should be aware of, including: Debt financing refers to borrowing money and then paying it back, most likely with interest. Most commonly, this is in the form of a loan, although there are some other types of debt financing. Debt financing may come with restrictions on your company’s activities. If your company needs to access additional debt financing in the future, it’s important to note that creditors look favorably on a low debt-to-equity ratio. Like equity financing, there are a few advantages of debt financing that include: There are also disadvantages you should be aware of: Depending on how well your company performs, debt can be cheaper than equity, but the opposite is also true. If you’re unable to turn a profit and you close, then equity financing costs you nothing. If you take out a loan via debt financing and make no profit, you’re still responsible for paying back the loan plus interest. In this scenario, debt financing costs more. However, if you are successful and sell your company for millions, if you’ve given up equity, you’ll need to split that profit with shareholders. Created by Y Combinator, the simple agreement for future equity (SAFE) is a common equity funding document. The SAFE is a simple agreement that grants investors the right to purchase equity in the company at a future date. This allows the company and investors to delay the negotiation of company valuation and terms of investment until a later equity funding event. A convertible note is a type of debt financing that provides a loan with interest with the expectation it will convert to equity. The investor will need to receive a balloon payment on a specified date or be allowed to convert the note to shares during a future equity funding event. Also, the notes generally provide a discount on the share purchase price paid by the future investors. Many companies find going through a priced round to be a slower, more costly process because of the back and forth of negotiating terms and high legal costs that are expected to be paid by the company. Therefore, early-stage companies tend to gravitate towards SAFEs because they are simpler and quicker. However, when markets fluctuate, investors may become more conservative and prefer a priced round over a SAFE. We’ve made the equity financing process simpler with our Automated Equity Financing. Now you can close in as little as 14 days and save money on legal fees because attorneys will be focused on the important parts of the deal and not templated documents. Learn more about how it could help your company through your next round.Overview
What is equity financing?
What are the benefits of equity financing?
What are the disadvantages of equity financing?
What is debt financing?
What are the benefits of debt financing?
What are the disadvantages of debt financing?
Is debt financing cheaper than equity financing?
Are SAFE Notes and Convertible Notes debt or equity financing?
How to make the equity financing process cheaper and quicker
Tania Huzieran, Senior Manager, Private Market Marketing