
Ask HN: If you plan success, why ever raise equity instead of debt? - flibble
If you believe in your company why would it ever make sense to raise equity instead of debt?
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brudgers
Raising equity under terms typical in Silicon Valley allows an alignment of
interests between employees of the company (founders in a C Corp are
employees) and the investors. Because the primary returns for both sides come
from increased equity value and not from cash flow. This makes cash flow
available for growth and growth increases the value of equity. Relative to
debt both interest and principle repayment can be thought of as indefinitely
deferred.

Loans drag on cash flow and payments made are at present value not discounted
to the future. Those payments are not available for growth and there is always
less cash on hand. As they say “cash is king.”

There are many many businesses where loans are better. And there are many
ordinary investors which prefer ongoing income over all or nothing bets on
equity.

Loans are income oriented and make more sense for companies with income
oriented owners. Equity is capital oriented and can better provide compound
returns. Of course there are bad (for growth) equity terms which extract cash
like a loan and hold the company as collateral. The private equity investment
model often works that way.

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Someone
To be able to lend money, the lender has to believe in your company, too.

If no potential lenders do, you can’t borrow money. If those that believe in
you don’t believe you that well, they’ll ask for high interest rates that make
lending unattractive.

Finally, your belief in your company may not be absolute.

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nicholas73
Assuming you can raise debt, the other reason would be that if you fail to
make debt payments then you potentially lose your company. Shit does happen,
and it doesn't take a once in a lifetime virus to wreck your plans.

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quickthrower2
Flip it around, would you lend money to a startup? What interest rate would
you want? Would you prefer to lend money to someone with collateral?

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dnh44
I suppose one reason is that the debt can sometimes come with a personal
guarantee attached.

