With Valentine’s Day approaching, it’s the perfect time to talk about debt. I know it doesn’t sound like the most romantic topic, but hear me out…I’ve always thought that debt is like dating, and equity is like marriage. And this first date can definitely lead to happily ever after.
Many companies find themselves captivated with venture capital — it is a darling in the finance world, and it certainly has its place. Venture capital often comes with name cachet and validation, and the enticing element of having someone give you money upfront that you may not need to pay back.
Debt, on the other hand, doesn’t seem as sexy. You know you have to pay it back, and it sounds expensive.
The difference is with debt — like dating — is that it’s not tricky to untangle. When it’s time to walk away, you can do just that.
Equity, however, is like a marriage. You’re in it for the long haul – and when it comes to divorce, it can be complicated, challenging, and above all, costly.
Let’s say a venture capitalist invests in your company in return for 10% equity. Exciting, right? Someone is validating your idea and giving you the money you need to grow. Let’s say you become super successful, and you find a company that wants to acquire you. Also exciting, right? But when you sell for $20 million, you just gave away $2 million of that payday to your investor.
On the other hand, if you were to finance your growth via a line of credit and pay it back, when you sell you own most — if not all — of your company. I say most because venture capital and debt can work hand-in-hand, so if you are using a combination of the two, you have likely given away a smaller piece of your pie. In that $20 million payday example, maybe you pay a couple hundred thousand on your line of credit versus $2 million.
That means a bigger payday for you. And that, I think, is a fairytale ending.