What is the difference between equity and debt financing?

Bill Reichert, Managing Director at Garage Technology Ventures explains when you should go for equity financing or debt financing.

Bill Reichert has over 20 years of experience as an entrepreneur and operating executive. Since joining Garage in 1998, Bill has focused on early-stage information technology and materials science companies. He has been a board director or board observer at CaseStack, WhiteHat Security, ClearFuels Technology, Simply Hired, MiaSole, D.light Design, ThermoCeramix, and VisaNow, among others.

Transcript:

What is the difference between equity and debt financing?

As an entrepreneur, when should you be going after equity financing and when should you be going after debt financing. Pretty much you don't have a lot of choice in that, it depends on your stage of development. So in very early stages, at the seed stage, most likely what you're going to do is raise a convertible note, but that convertible note is going to be translated into equity later on. At the seed stage though, you don't want to be doing an equity financing because an equity financing requires that the investor and you as an entrepreneur, agree on the price of the company, how much is the company worth and when you're just starting a company it's really hard to put a precise price on the company.

Generally, during the seed stage investors use a convertible note. That convertible note will convert at a price that is determined later on by for example this series A preferred equity investors. So generally, you don't get a priced round of financing until you bring in a venture capital firm that does a more significant round of equity financing. At that point, your convertible notes will convert into equity in the form of preferred stock. So if you're an entrepreneur and seeking to fund, your law firm and your other advisors should be able to tell you based on the stage that you’re at whether it's likely to be in the form of a convertible note or in series A or preferred equity financing.