There are times when this choice is necessary and appropriate.
I have always been a big proponent of the principle that at whatever stage a company is in, when there is a need for capital it is wise to consider both debt and equity alternatives and then decide which is best for you.
I have an inherit bias towards debt. It’s almost always cheaper then equity if things work out as planned, and allows the entrepreneur to stay in control of their company and avoid dilution.
Today, I was asked an interesting question when I was conducting a Vistage workshop for a group of CEO’s. A member challenged me (which is great) and asked me if there are scenarios when equity is better than debt.
And my answer is that I think there are three scenarios when it’s better to take on equity vs. debt.
1. If the company needs more money, and has maximized its borrowing capacity.
2. If the CEO / entrepreneur feels that they have maxed out on the personal risk they are willing to take with the company and want to take some chips off the table.
3. If there is an investor that brings significant strategic value to the business (more than money) and you feel can help grow and support the business that you want to build.
None the less, I offer two cautionary notes.
1. There is probably (and usually) a way to do what you want to do with a lot less money than you think. Challenge your assumptions hard and think through different scenarios.
2. Consider your courting with an investor like a marriage, and don’t fall for the Shark Tank myth of love at first site. Have serious conversations with the investor about the business you want to build, and discuss good and bad scenarios and how you would both respond to them.
Remember that when you take on a loan, you’re obligating yourself to pay it back. And when you take on an investor, you effectively just got married for the life of your company. This decision is worthy of a lot of thought and consideration.