Many startups don’t understand what is the difference between Equity Investors and Debt Investors. We would like to briefly explain the differences.
Equity = Investment
- For: generate future income, you don’t sell later
- Use: running cost, to run operation, ex. employee, marketing, rent
- Investors get: company shares, profit(income-expense) of the company (profit is not only expressed as money, but it could also be expressed as cost)
- Return on investment: is higher than Debt investor, but the risk is higher as well
- Investors’ Risk: company spend too much cost, and they can’t pay back to investors
- Investor need: help growth management
Debt = Loan
- Investors get: interest of the loan
- Return on investment: around 20% per year
- Investors’ expense: tax, bank fee
- For: sell later, depends on the company
- Use: buy material to manufacture the product, buy the product to sell later
- Advantage: Lower risk to keep the value
If you have any question, please feel free to leave your comment, or discuss with us.