Debt vs. Equity

Debt vs Equity

Equity is lifeblood for entrepreneurs. A most precious possession that reflects the hard-won spoils of countless hours and intellectual ingenuity. Decisions to deploy or protect that equity in the early days will be compounded in the long run.

Savvy entrepreneurs use valuations to consider if and when to "spend" equity.

Let's consider the case of Company X with a realistic $1MM Stage 1 valuation. The company needs $300K to build its prototype, develop an app, or create its MVP (minium viable product). As a result of this development process, Company X would achieve a Stage 2 valuation of $3MM.

In essence, Company X needs to raise $300K to progress from Stage 1 to Stage 2. One option is to raise the $300K from friends, family, and local investors in return for 30% of the company ($300K / $1MM = 30%).

Alternatively Company X could raise the $300K using debt.

In the equity model Company X has sold 30% of a stage 2 $3MM company at a real cost of $900K ($3MM x 30% = $900K).

While the exact numbers in a debt scenario depend on the terms of the loan (interest rate, duration, etc), it's clear to see how a debt facility could help entrepreneurs preserve substantial value as compared to an equity facility. In many cases the cost of servicing a $300K loan will be substantial less than the $900K cost Company X paid to raise $300K in the example above. 

Our debt vs equity calculator (LINK) will help shed more light on this vital decision. 

At times people look at debt as a "four-letter word" as banks require assets or well-established cash flow before even having a conversation with you. OKR is a debt provider specializing in bridge financing secured against government grant/credit programs in the period before they are paid out. 

We encourage entrepreneurs in all industries to explore the vast potential of both provincial and federal grant and credit programs to help fund their capital needs and use our services if they see an opportunity to leverage these funds sooner rather than later. 

At OKR, our goal is to ensure entrepreneurs have an option beyond shedding valuable equity to raise capital.

Debt vs Equity Calculator

Inputs
Capital Needed

% From Debt

% From Equity


Pre-money Valuation

Sale/IPO Valuation

Annual Debt Interest Rate
%


Debt Vs Equity
Capital Needed

Pre-money Valuation

Post-money Valuation


Pure Equity
Founders Ownership

Founders Value


Debt + Equity
Amount of Debt

Amount of Equity

Debt + Equity

Cost of Debt

Annual Interest Payment

Post-money Equity Value

Founders Ownership

Founders Value
Summary
Pure Equity
Debt + Equity

Sale/IPO Value

Cost of Equity

Founders Value


Cost of Debt

Total Cost


Less: Outstanding Debt

Founders Net Proceeds