Pros and Cons of Equity Investing and Debt Financing

Currently, equity investment and debt financing have been widely circulated among startups and investors. These two choices are made by new startups to startups that have entered the fundraising stage starting from: seed to series A. But before you choose to get funding in the form of equity or debt financing, it's good to know the pros and cons of each investment as described above. written by Shweta Saxena Singh.

Equity Investment

Funding in the form of equity investment is usually chosen by many new startups. The convenience offered by equity is certainly the main reason why in the end this investment became an option, in contrast to debt financing which tends to be more complicated and requires certain criteria. The limited access of new startups to debt financing investments is also one of the reasons why equity investment is an option.

The following are the pros and cons of getting a startup to invest in equity:

Pro:

• No need to worry about refunds. When a startup decides to accept investment in equity it is automatically a position founder with investors in the same or equivalent position. Each side will seek the highest score to launch exit strategy. Plan exit strategy this could be a further fundraiser with a higher valuation, an acquisition, or an IPO.
• Funding when needed. Equity investors will usually provide funding when a startup is just starting its journey and need funding to develop products, increase the number of users, expand operational reach, and so on.

against:

• Funding risks losing control of the company. Usually the loss that will be experienced by startups if they take equity investments is the loss of 10-20 percent ownership of the company, especially in the seed funding stage. Then when it will get series A funding, the company will again lose ownership of 15-25 percent.
• Startups are required to provide reports to investors. Another cons is the startup's obligation to submit periodic reports to investors. This includes all financial reports for product trials to campaign activities at startups. This is not an easy thing for a novice founder to do in the early stages of his journey in the startup world.

Debt financing

When the startup is mature enough to run its business and already has a fairly high valuation value, borrow money from the company Venture Debt Capital Markets can be activated automatically. Usually startups that can get debt financing are startups that are 2 - 4 years old and have received series A funding from private equity.

Apart from the two conditions mentioned above, companies can increase accounts payable when they have some clarity in their and future financial projections. The company also has to pay back the amount owed within a certain period of time along with interest.

The following are the pros and cons that startups will experience when accepting investments in the form of debt financing:

Pro:

• No equity disbursement. Companies do not need to disburse their equity stake to increase debt although there is an equity warrant clause in accounts payable that allows a choice of accounts payable funds to participate in up to 1-5 percent of the loan amount in the case of another round of funding or startup acquisition.
• Party Venture Debt will give the company time to raise the next round of funding from private equity investors (EP). Thus, each party can negotiate regarding the best valuation and terms when the time is up.

against:

• The company must run stably. When a startup is running a business with debt financing, make sure the company can get profit margin and cash flow which increases. However, the future of running a business is unpredictable. On the other hand, the debt must continue to be paid with interest every month. If a startup fails to fulfill its responsibilities, bankruptcy and litigation is a reality that must be faced.
• Increase work pressure. Increasing debt can put extra pressure on the company in terms of the interest expense that must be paid in the range of 15-30 percent. However, this choice is the effect of being satisfied with full ownership of your company.

In the end one founder responsible for preparing and ready to accept all risks when funding in the form of equity investment or debt financing is an option, of course based on the pros and cons of each described above.