Investor debt vs investor equity
Investor debt is money an investor lends, which the business agrees to repay, usually with interest, within a set timeframe. Investor equity is money put in for a share of ownership, which does not have to be repaid but can bring the investor a say in decisions.
A buyer who brings in a private investor to fund an acquisition has to decide which form the money takes. BDC describes a loan as an arrangement where the company agrees to repay the loan and pay the cost of borrowing, usually as interest, within a predetermined timeframe. The equity partner vs debt financing comparison sets the two side by side.
What equity means
BDC defines equity financing as raising capital by selling to investors, giving them an ownership stake. It says the money does not have to be repaid, but the business must give the investor a percentage of ownership, which may also include some decision-making control. A second BDC article says preferred shares grant powers such as priority if the company is dissolved and a veto over hiring and layoffs.
What to ask the investor
- Is the money a loan, shares, or something that can convert from one to the other?
- If it is debt, what interest, repayment schedule and security does the investor expect?
- If it is equity, what ownership and what control rights come with it?
- How does the investor’s claim rank against the senior lender’s?
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentWhat is equity financing
- 02Business Development Bank of CanadaGovernmentEquity financing or loan? Which to choose for your tech business
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