Equity or Debt Financing for your Venture? Or perhaps something else..

Many start-ups in the early days of their inception frequently run into problems and pivots throughout this stage of the game. One of which is the question “do I need additional capital from outside sources?” Many times, this answer is yes.

With that, there are two different kinds of financing a founder can inquire to: equity and debt. Each come with their own set of pros and cons.

With equity financing, the company does not take on any debt on the balance sheet, and you are not spending that precious outflow of cash on interest payments. The downsides, in my opinion, lie in two things: loss of control, and loss of profits down the road when the company is worth bookoo bucks. Facebook Founder Mark Zuckerberg held the majority of his company until it went public. Control is an important thing to have, and once you lose the majority, its very likely that you’re seat in the company can be taken.

With debt financing, your company retains the equity you have built up, however now the company has repayment obligations and you are spending important capital on repaying a loan. Furthermore, it may be difficult for a founder to get a loan without many sales unless he or she signs a personal guarantee (which I was taught by my mentor to NEVER EVER EVER sign). With a personal guarantee, this means creditors have a right to collect from your personal assets if your business cannot meet its obligations.

Now, thanks to the advancement of technology and access to capital, there are many other resources out there for entrepreneurs other than groveling to banks or selling your soul to outside investors who may just want you out and simply want your business. *Note, I am not all against equity investing, just be sure that anyone taking equity is in it WITH you and wants to work with you to enhance the company together.

One of these sources is crowdfunding. These are platforms where companies collect monies from individuals interested in their venture and product/service. This usually involves some decent discount for the product in exchange, and perhaps an extra offer or two. I have always seen this method not as a big money makes, but to bring about brand awareness, infuse your company with capital, and probably makes a little something along the way. Its a great way to see if your product has actual demand in the marketplace.

Additionally, there are great resources offered from the SBA. Check in with your local office or non-profits that focus in incubation or acceleration of start-ups (I live in Pittsburgh and there are several in town). There are so many resources out there and do your own research on these and other options for your venture!