from Hacker News

Ask HN: If you plan success, why ever raise equity instead of debt?

by flibble on 7/5/20, 5:28 PM with 5 comments

If you believe in your company why would it ever make sense to raise equity instead of debt?

  • by brudgers on 7/5/20, 8:48 PM

    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.

  • by Someone on 7/5/20, 5:57 PM

    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.

  • by nicholas73 on 7/5/20, 7:52 PM

    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.

  • by quickthrower2 on 7/5/20, 8:17 PM

    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?

  • by dnh44 on 7/5/20, 8:56 PM

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