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Equity vs. Debt: There’s Less Choice Than You Think

Let’s simplify things.

I’ve worked with tens of founders, many of whom are interested in non-dilutive capital despite the fact that they have zero, or very little actual revenue. So before we dive into the details, let’s make this easier on all of us and eliminate a few options right out the gate:

  • If your company doesn’t generate revenue, you can’t take on debt.
  • If you don’t have a high-growth business, you can’t take on equity financing.
  • Finally, if you want full control and ownership of your company, then don’t take on equity financing.

Put another way, the above three points can also be stated in the affirmative as such:

  • If you have revenue, you have the option between debt and equity.
  • If you are pursuing a low-growth business or a small market, debt is your only option.
  • If you want control and ownership of your company, debt is your best option.

At this point, you ought to understand generally which category your company fits within, and whether or not you even have the option to pursue debt as a method of financing your company. If you are generating a solid amount of revenue (at least $5k/month at a minimum) we’ll dig into the decision-making process in the next post.

And until the next post is published, to save you the time of scouring the internet, I’ve also gathered up the top articles on equity vs. debt and provided the main takeaway from each:

  • An example scenario of two identical companies – one that chooses debt, and one that chooses equity financing, and then shows the financial impact on each, which is a useful in demonstrating how the mechanics of each work.
    Article: Equity vs Debt Capital Funding: Comparing the Costs

    Takeaway: “if you’re looking for a lower cost of capital for startups, venture debt is often the best way to go long-term (as this scenario explained). But, if you’re looking for operational funding to maintain your organization as you scale up or have already utilized debt financing, SaaS equity financing may be the better route for you.” (take this with a grain of salt as it’s a sales pitch).
  • A well-written article that essentially explains the different types of equity and debt funding, along with some pros and cons.
    Article: Debt vs. Equity Financing: Pros And Cons For Entrepreneurs

    Takeaway: “the biggest and most obvious advantage of using debt versus equity is control and ownership.”
  • A bullet point list of attributes for both debt and equity that has a number of great points buried within it.
    Article: Debt vs Equity in the Startup Venture

    Takeaway: “A company must maintain a debt to equity ratio that meets the capital needs of the company while not making the company fiscally vulnerable. An investor will be reluctant to invest in a highly leveraged business (i.e., has lots of debt) because the equity investment is always subordinate in priority of payment to the debt.”
  • A bunch of quotes from various founders on their one-sentence opinions of the two options. The quotes are all over the map and not very helpful.
    Article: Debt vs. Equity, Which is Right for Your Startup?

    Takeaway: None, but it does provide a number of different perspectives on this issue and shows how difficult a decision this can be without access to proper advice and data.
  • The first article that even references the actual decision. Finally! and thank you.
    Article: The Difference Between Debt and Equity Financing

    Takeaway: None. However, this was the first article to at least mention the question of “How to choose between debt and equity financing” – they just didn’t answer their own question, and instead referenced the weighted average cost of capital (WACC) which isn’t relevant for a decision between debt and equity, but instead helps a company compare scenarios where BOTH equity and debt are involved.
  • This article just defines the different types of financing, for the 1 millionth time on the internet, but does provide a good point about tenure.
    Article: Debt Funding Vs Equity Funding For Startups: Pros And Cons

    Takeaway: “In comparing equity fund vs debt funds, tenures are usually longer for equity funds, while debt funds are categorised into short term and long term. Long term debt funds are raised for capital costs which have high-interest rates, and have company assets as collateral. Whereas short term funds are utilised in recurring payments, have lower interest rates and minimal collateral requirements.”

In my next post, we’ll get into the a more nuanced decision-making process for determining the best path forward among all of the financing options available to you – particularly if you’re a high-growth revenue-generating company, which essentially means the world is your oyster.

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Equity, Speed, and Cash Flow: You Can Only Pick Two

I have a hypothesis, which is that between the three options of:
1. Keeping equity
2. Reducing / eliminating any negative impact on your cash flow
3. Increasing the velocity of your startup / company

that you can only pick two. I drafted up a diagram to help illustrate the point:

To my mind, you can’t ever get all three of those corners of the triangle to align so perfectly that you are able to accomplish each goal simultaneously.

As an example, if you take out any sort of loan / debt, you obviously have put a dent in the future cashflows of your business, however you get to accelerate the velocity of your firm while keeping equity – landing you on the right side of the triangle.

If you don’t want to impact cash flow, or perhaps you don’t have any cash flow to speak of, yet you want to increase the velocity of your company – then you land yourself at the bottom of the triangle within the equity financing realm of the world. Get your pitch deck ready.

And finally, if you don’t want to – or can’t – reduce your future cash flow, and would also like to keep your equity, then you’ll likely need to simply bootstrap your company: that is, self-fund it.

It’s pretty simple. However, if you see any issues with the above mental model I’d love to hear them. Tweet at me if you have any thoughts: @thomasgrush.

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Director of Venture Strategy

Introducing Bootstrapp

Bootstrapp is building a community of founders interested in bringing more transparency to the early-stage investing + lending market. We believe that the capital markets that serve startups will become increasingly fragmented over time, and that owning the interface – where customer decisions are made – will create the most value for founders, Bootstrapp team members, and society. 

We are a very early-stage startup that is working directly with other founders, non-dilutive financiers, and a small group of advisors 

We are entering a decade which will likely uproot the traditional financial ecosystem – driven by the ability to programmatically manage capital, generate data-driven insights into true impact of investments, and a cultural shift towards equitable access to capital.


Description of the Director of Venture Strategy Role:

  • Implement an early-feedback loop to enable continuous feedback, learning and iteration for Bootstrapp’s products and services
  • Lead the development of a comprehensive go-to-market strategy which includes the ability to remain agile and react to market forces, customer feedback and more. 
  • Create intellectual property, points of view and industry-related content which will help elevate your professional profile
  • Lead the development of the Bootstrapp corporate development strategy by deeply understanding the market opportunity, customer feedback, and product roadmap. 
  • Ensure that the Bootstrapp team is consistently synthesizing market feedback to recommend opportunities for changes or improvements to be included in subsequent releases
  • Foster an atmosphere of innovation and excellent user experience for our customers
  • Support conversations with potential investors, advisors, and/or corporate partners. 
  • Be honest with other team members and partners, have fun, and work on the things that you find the most interesting.

As Director of Venture Strategy, you will benefit from having the following attributes and experience: 

  • A deep interest in value creation and startups. 
  • A desire to learn about prototyping, design, FinTech, and technology-enabled services. 
  • Considerable experience with strategy development, business planning and future-visioning. 
  • Design or product development expertise preferred, but not required.
  • An ability to operate effectively within ambiguity – i.e. being able to understand how to create value as an individual and company, and then drive relentlessly towards it, as you will have full autonomy on how you achieve the goals that we mutually agree on.

To apply, please provide your information here.

Bootstrapp provides equal employment opportunities (EEO) to all employees and applicants for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, age or disability.

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The Full Spectrum of Non-dilutive Growth Capital

The first major venture capital deal was made in 1957, in the form of a $70,000 investment in Digital Equipment Corporation (DEC). Since then, the industry has hardly evolved at all, until recently. 

Over the past few years, the pace of evolution has quickened. There are various investment models (the SAFE, the SEAL, revenue-based financing, and more). However, because the models are still quite young, there isn’t much publicly available data on them, let alone clearly defined definitions of each. 

This post is a simple attempt to simplify the conversation. I’ll dive in much deeper in following posts, breaking each financial instrument down into its component parts so that we can better understand the mechanics of them, but for now let’s consider that detailed breakdown as out-of-scope. 

Today, it’s all about simplifying the world of startup financing – particularly the non-dilutive realm. So let’s start with the basics: 

How are each of the non-dilutive financial instruments defined in layman’s terms? 

Leaning heavily on my experience in the startup finance space, lots of reading, research, and the collection of data on over 140 non-dilutive financing options, I’ve developed the below definitions. They are ordered roughly along a spectrum from debt → equity – meaning that the first item listed (Term Loan) is the most debt-like, while the last (SEAL) is the most equity-like. 

Definitions of growth capital: term loan, venture debt, working capital loan, invoice factoring, merchant cash advance, revenue-based financing, safe, convertible note, seal.

Have a different perspective? Do you disagree with any of the definitions above? I’d genuinely love to hear your thoughts. Please shoot me a note or comment so that we can develop a shared language (i.e., a commonly understood set of references, visions, experiences, and/or interactions that provide a foundation for strong communications) with regards to non-dilutive financing. 

With definitions of each type of financing somewhat settled, I then captured all of the typical attributes of each as well: 

Attributes of growth capital: term loan, venture debt, working capital loan, invoice factoring, merchant cash advance, revenue-based financing, safe, convertible note, seal.

There are certainly exceptions to the typical attributes as I’ve outlined them above. However, in my experience these are directionally correct in the vast majority of cases. If you disagree – please chime in so that the entire community of startup founders can benefit. 

No silver bullet

With a very general and broad understanding of the financial instruments we’ve covered here, it’s clear there is no silver bullet for all founders, and there’s no way to be 100% certain that a particular source of capital is the best one. However, after speaking with hundreds of founders looking for funding, it’s become incredibly clear to me that it’s really difficult to even understand the trade-offs between the various options. And if you can’t even properly account for the trade-offs, a founder can’t be expected to make the best decision for their company. 

As such, this is a framework that is meant to help all founders consider what trade-offs they are making when they decide to choose one type of financing over another. 

Hope it helps, and reach out to our team if you have any questions about anything growth capital-related.