Equity, debt or convertible debt – That is the question
Alex Liu //August 20, 2018//
Equity, debt or convertible debt – That is the question
Alex Liu //August 20, 2018//
Before raising money, it's important to recognize all the available options for small business financing. What makes the most sense for you to grow your business: Equity, debt, or convertible debt?
Raising capital with equity – allowing investors to buy stock in your venture by giving them a financial stake in the future of the company – is a popular route many entrepreneurs take.
HOW IT WORKS
1. You set a specific dollar amount – valuation – for what your company is worth.
2. Based on that valuation, investors agree to give you money in exchange for a percentage of the business.
3. Investors receive compensation based on the percent of stock they own once you sell the company or take it the public market.
PROS
CONS
Debt-based fundraising – when money is loaned to you following an agreement that you'll repay it over time with an established interest rate is the form of small business financing most small businesses end up going with, according to Fundable.
It's also the easiest to understand.
HOW IT WORKS
1. You borrow money upon agreeing to pay it back with interest in a set timeframe.
2. You will also have to offer your lenders some form of collateral, which are liquid assets you will give up if you cannot make your loan payments.
PROS
CONS
HOW COMMUNITY FUNDED WAS FOUNDED
A convertible debt structure is a combination of debt and equity financing. The money raised is considered a loan, but at some future date the loan can convert equity if the lenders so choose.
HOW IT WORKS
1. You will negotiate an interest rate to pay back the loan. This will also be the interest rate for those lenders who decide not to convert any debt into stock.
2. The details of how lenders convert the debt into equity are negotiated at the time of the loan. For the most part, that means agreeing to give lenders a discount or warrant on an upcoming round of equity fundraising.
3. You will also set the valuation cap, or maximum valuation, at which lenders can convert debt into equity. If investors decide not to trade in their loan for shares at this predetermined valuation, they can no longer do so at a future date.
PROS
CONS