> It's common to describe both debt and equity rounds as a 'raise'.
I disagree, I always interpret "raise" as equity.
> My guess is you're operating under the assumption that debt is inferior to equity because you're forced to pay it back. But, in reality, when you raise an equity round, you also have to pay back the principal + "interest"-- it just delays the repayment date til your liquidation event.
Debt and equity are two very different structures. Mainly due to whose cash moves where, and when.
Debt gets repaid from actual company cash flow on a pre-agreed timetable and at a specific interest rate. If debt isn't repaid, creditors can try and recover their debt in bankruptcy proceedings (usually second in line after unpaid wages).
Equity doesn't get "repaid" in any sense (aside from liquidation or share buy-backs, which almost never occur pre-IPO). Once raised, that money is the company's, and the equity you get in can only be bought and sold.
Raising equity means diluting your ownership stake (so its worth proportionately less of the entire value of the company). Once raised, it doesn't force the movement of cash in any direction. If there's no liquidity event, then equity holders can't force the company to cough up that money.
Note "liquidity event" is distinct from "liquidation" - the former means an opportunity for equity holders to sell down their shares, the latter means the company is bankrupt and i being dissolved, with assets sold/distributed.
I kind of agree, theres an obvious difference between a bank loan and typical startup equity seed round. However it does get very blurry in practice, eg:
- Redemption rights & liquidation pref in preferred shares effectively turn it into a loan
- Convertible notes are debt instruments but most obviously should be described as "raising"
- Venture debt typically has upside in the form of share options in addition to the debt repayment mechanism
> Edit: Also debt and equity are not always that straightforward, they are shades of grey. Convertible notes are debt that look like equity.
Right, but that just reinforces my point. Debt is different from equity, which is different from a note. Legally and commercially, outside investors (or acquirers) are going to treat them all differently. It's not as simple as "raising $X means you have to repay $X+Y, no matter whether its debt, equity or note".
I disagree, I always interpret "raise" as equity.
> My guess is you're operating under the assumption that debt is inferior to equity because you're forced to pay it back. But, in reality, when you raise an equity round, you also have to pay back the principal + "interest"-- it just delays the repayment date til your liquidation event.
Debt and equity are two very different structures. Mainly due to whose cash moves where, and when.
Debt gets repaid from actual company cash flow on a pre-agreed timetable and at a specific interest rate. If debt isn't repaid, creditors can try and recover their debt in bankruptcy proceedings (usually second in line after unpaid wages).
Equity doesn't get "repaid" in any sense (aside from liquidation or share buy-backs, which almost never occur pre-IPO). Once raised, that money is the company's, and the equity you get in can only be bought and sold.
Raising equity means diluting your ownership stake (so its worth proportionately less of the entire value of the company). Once raised, it doesn't force the movement of cash in any direction. If there's no liquidity event, then equity holders can't force the company to cough up that money.
Note "liquidity event" is distinct from "liquidation" - the former means an opportunity for equity holders to sell down their shares, the latter means the company is bankrupt and i being dissolved, with assets sold/distributed.