Equity vs. Debt Financing: What's Best For Your Startup?
Discover the pros and cons of equity versus debt financing for startups. Find out which option is best for your business and funding your growth.
Written by: Alex Sventeckis

Discover the pros and cons of equity versus debt financing for startups. Find out which option is best for your business and funding your growth.
Written by: Alex Sventeckis
Discover the pros and cons of equity versus debt financing for startups. Find out which option is best for your business and funding your growth.
Written by: Alex Sventeckis
Money makes the world — and your startup — go ‘round. As your idea gains traction and your startup takes shape, you’ll need capital to maintain momentum and grow your vision. Generating revenue certainly helps your cause, but sometimes, you need significant cash to break through a barrier and expand.
Two primary types of financing are commonly used in the startup space: equity and debt. Each type offers advantages and drawbacks, and the one you choose depends on a host of factors. So, how do you decide which is worth pursuing?
Let’s dive into equity versus debt financing and see which one might best fit your startup’s needs and goals.
Equity financing is when a startup raises money by selling ownership shares in the company. Investors exchange capital for equity stakes and a share of the future upside (or risk). If you’ve seen companies “raise funding rounds” or terms like “Series A funding,” that reflects the equity financing process.
Common types of equity financing include:
Debt financing is when a startup borrows money and agrees to repay it over time, typically with interest. You hang onto company ownership, but any debt instrument requires repayment, no matter how your startup performs.
Common types of debt financing include:
Each funding option carries benefits and drawbacks.
Equity financing can help companies that pose higher risks, like smaller firms or those working with unproven technologies or markets.
There’s no obligation to repay if the company fails — investors spread the risk amongst themselves.
With strong investment partners, you gain strategic support, valuable connections, and enhanced credibility.
The tradeoff? Every round of equity investment “dilutes” your share of ownership (meaning less of the company’s success or failure is yours). The more you give away, the less ownership and control you can exert over your startup’s progress.
Debt financing offers independence: You keep control of your startup and can find financial benefits, such as deducting a loan’s interest from your company’s taxes.
However, debt is typically reserved for more established startups, which have regular revenue and predictable cash flow. Lenders who extend debt options want to feel confident they’ll get their money back.
Debt requires repayment. If your cash flow crashes, you still owe anyway.
Here’s a breakdown of additional differences between debt and equity financing:
Determining your type of funding is an important business decision, so you should ask yourself several key questions about your startup. I also spoke with founders who faced these questions, and I’ve provided their insights throughout.
If you’re struggling to get started, try answering these 10 questions.
Without cash flow, your capital structure doesn’t matter much. Review your revenue, profit margins, and other key financial metrics, such as customer acquisition cost.
Your startup’s stage determines not only what resources you need but also what’s even available to you.
Recurring revenue is a key component for winning over lenders and other creditors, who expect regular payments.
I’ve seen plenty of founders enamored with the idea of raising capital. There’s money to be had, and spending OPM (other people’s money) feels different. But investment also brings validation.
Someone else thinks the idea is worth exploration and growth. That’s a powerful sentiment.
However, it can also keep founders from considering other, stronger long-term options. That’s what Christopher Helm, CEO of Helm & Nagel GmbH, has seen play out many times.
“What I see too often: founders raise early, get diluted fast, and end up with 10 people on their cap table and no leverage. They start out dreaming of independence and end up fighting for permission to build their own vision,” he said. “That's not freedom — that's employment with extra stress.”
Helm encourages founders to focus on bootstrapping first to force clarity and truth about their startups. Doing so lets you build for cash flow instead of flashy pitch decks.
You develop offerings that work because you need them to work. According to Helm, that style attracts investors and enables the founder to go from needing funds to wanting funds.
“So before you ask equity or debt, ask this: Can I earn $1 today without asking anyone for permission?” Helm told HubSpot for Startups. “If yes, you already have what most funded founders are still trying to buy: control.”
Ownership comes with benefits and risks. As you fundraise, you’ll decide how much it matters to you.
Relationships with investors, banks, and other lenders will shape which options you can pursue.
All capital is not equal. How you structure funding affects how quickly you receive it (or burn through it).
Your capital structure affects your current and future cap table as well as your payout upon exiting.
Founders often get so excited about launching or growing their startups that they never stop to consider how it’ll end.
Planning to exit your startup can feel almost sacrilegious, and it’s not guaranteed you’ll ever reach the end you want. But with a sense of where you want your startup to go, you can make wise decisions about funding.
That’s the decision tree Kristin Marquet, founder and creative director of Marquet Media, walked through with one of her startups. Her focus was on building and scaling her platform, FemFounder, to accomplish its goal of empowering women founders.
FemFounder was generating modest revenue but had high engagement and significant potential. After bootstrapping through testing phases, Marquet deployed a specific decision framework:
Weighing her ultimate goals and exit potential, Marquet made her choice.
“In the end, I chose debt — a small line of credit paired with reinvested earnings. It gave me freedom without sacrificing the equity in a brand I knew could eventually be worth seven figures.”
As with many things in life, timing is everything. Economic fluctuations are outside of your control, but they greatly affect your financing options.
Money today changes what’s possible tomorrow. Your financing options will open certain paths — and close others.
Who you invite into your startup can alter your company culture, for better or worse.
Debt and equity financing isn’t just money; it comes with strings. As you review which type of funding (if any) to accept, consider the splashback effects it’ll have on who you are and what your company represents.
Viktor Ilijev, Chief Pitcherman at Viktori, shares a recent example that hits on this point exactly.
“I worked with a founder doing $80K in MRR, post-traction but pre-scale. They had VC offers on the table — glamorous ones,” Ilijev told HubSpot for Startups. “But every equity term sheet came with a growth mandate that would've turned their thoughtful, brand-first startup into a burn-and-churn machine. Speed would've come at the cost of culture, customer intimacy, and optionality.”
Ilijev dug deeper with the founder, and together they realized the company needed to buy time to grow.
Instead of flashy VC cash, they structured revenue-based debt with friendly repayment terms to encourage thoughtful growth, which the founder achieved within six months while retaining full equity.
“Equity can be fuel, but only if you're already built like a racecar. If you're still tuning the engine, debt gives you space to get it right before scaling what might otherwise be the wrong thing,” Ilijev said. “When funding urgency is high, ask yourself: Will this money expand my freedom — or mortgage my vision?”
Lead your evaluation with these 10 questions, and you should feel a strong pull toward debt, equity, or a combination of both.
Venture debt, equity rounds, valuation, and market conditions — there are a lot of factors to consider. I often find it helpful to see how other companies have approached their decisions and learn from their choices.
Let’s examine a few brand case studies where financing led to success.
Today, Amazon seems like it was always an inevitable behemoth, catching the internet wave early and riding it to trillion-dollar success. But in 1994, the internet was far from a sure thing. That’s the environment Jeff Bezos entered when starting Amazon, initially as an online bookseller.
Amazon began life with a “friend and family” round (essentially with Bezos asking his parents for money). In the first two months, sales consistently hit $20K per week.
However, Amazon had to build its entire infrastructure. After all, the internet was still a brave new world with no model to follow. Amazon needed long-term investments before it could reach reliable profitability.
Despite regular revenue, debt would thus prove too risky or inflexible for the company and its potential lenders.
However, those revenue figures, combined with an enticing new marketplace, created a compelling sales pitch for investors. In 1995, Amazon closed its first venture capital funding round at $8M and never looked back.
Equity rounds love the spotlight, while debt is more like the lead stagehand. But without wisely using debt, your entire production comes crashing down.
Netflix offers a powerful example of thoughtful application to debt to fuel growth.
In 2018 and 2019, Netflix leaned on low-cost, long-term bonds to expand its original content library and international presence.
Even though free cash flow dipped, Netflix could continue producing content and aggressively growing its subscriber base through debt financing.
In the end, the company kept strategic control and maintained shareholder value while smartly managing its money and growing its presence substantially.
If you’re looking for a successful equity crowdfunding example, I’d start with PopCom.
Founder Dawn Dickson became disillusioned with the advice and requirements from institutional investors and chose to raise money online.
The company’s retail tech platform has connected well with loyal customers and the broader community. To date, PopCom has raised over $5.6M.
Along with cash, crowdfunding also provided PopCom with a greater marketing reach and validation from customers and retail investors. Those are key secondary benefits that make crowdfunded equity something to consider.
Early startups rarely get to choose between debt and equity; they take what they can get. But as you gain traction and grow, you may blend different types of financing to meet short-term needs and long-term goals.
How does that look in real life? Let’s look at Tesla.
After several rounds of equity financing in its early stages, Tesla needed much more capital to expand operations and market penetration.
In March 2014, the company put debt to work by issuing $2B in convertible notes, allowing investors to convert bonds into shares if Tesla’s stock price exceeded a specific threshold.
Tesla’s use of convertible notes helped open access to capital quickly while delaying share dilution (and only if the company performed well).
Plus, the fact that investors could convert these notes into valuable shares made them extremely attractive in the marketplace, thereby driving down interest rates.
The sequence of events matters here. Equity financing earlier in Tesla’s life let it build up enough backing and clout to then issue high-value convertible notes when it needed immediate access to low-cost capital. Early investors who’d taken the chance on Tesla wouldn’t see their rewards diluted as the company grew.
It feels good to raise capital. Cash in the bank and validation from investors bring a certain satisfaction alongside business boons. But the wrong deal (or the right deal at the wrong time) can quickly reverse your fortunes.
What should you avoid as you fundraise, and what makes for a good investment partner?
Whether it’s your first or 40th time fundraising, you can and will make mistakes. While you can’t stop every mistake (welcome to startup life), pay attention to these common startup challenges:
Choosing investors is like entering any relationship. While you’re hopeful, stay vigilant for potential issues, challenges, or problems that may arise after the deal is completed.
You have your first “Yes” — congratulations! However, before you sign an offer and celebrate, review the documentation thoroughly (and bring in legal help when needed).
Consider these questions before closing:
Taking risks is part of being a founder, and taking on debt or equity financing is one of those crucial risks.
Done poorly, hypergrowth demands or interest-laden payments can ruin the best-laid plans and stymie your vision. Done well, and you can unlock growth and opportunity, and share your startup’s vision with the world.
In the end, the decision is yours. Analyze your startup’s current situation, potential for growth, and industry. Understand your risk tolerance and weigh your options.
You’ve worked hard to build something that matters. Now choose the financing that lets you keep building it on your terms.
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