Skip to main content

Are you considering raising money for your venture? Do you have an innovative idea you need some help financing? Equity, debt, crypto, or any combination of these can be used to raise funds. I will outline their traits and help you identify what's best for your needs.

Business Loan discussion, impressionist painting

At Fund Wisdom we review innovative funding and investing platforms and the changing market dynamics that accompany them. These funding solutions give us more insight to what businesses are using for funding sources and how successful they are. Depending on your vision for your business, certain methods of capital will be more appropriate than others. 

Below is a screenshot of our dashboard that provides a view of the financing options from our database of equity crowdfunding offerings. These charts show the rate at which others are using each type of financing.

2022 Reg CF Asset Types Offered

Equity - Sell Ownership

You can raise money by selling a portion of your business to others. Those people will then own shares in your company, and they will expect to receive a portion of company’s retained earnings at a future date. As shareholders, they will have a claim on the company’s assets after the debt holders. They may also require to have say-so in how the company is run by being able to vote according to what portion of the company they own.

The advantage to you is that most shareholders understand that they might not see payback from their investment for years. The importance lies in aligning your new investors to the timeline that you should expect to achieve profit and one day provide them an opportunity to sell their stake to someone else at a much greater price.

If you issue equity, you can choose from a few of these types:

  • Common Stock
    • Non-Voting
    • Class B 
    • Class A 
  • Preferred Stock
  • Simple Agreement for Future Equity (SAFE)

We will cover SAFEs in the convertible debt section as this is a method of raising money that straddles the line between debt and equity.   

Issue Debt - Borrow Money

If you don't want to sell equity, you can rely on debt. Investors give you money under the agreement that you’ll pay them back, plus interest. 

The advantage that debt investments tend to be less risky than equity investments, but with lower and more consistent returns. You to retain control of your business. However those who lent you money might require that you back it up with collateral; the risk for you is that if you default on the loan, you could lose those tangible assets. Debt investments will often have lower returns for the investor as they typically require a lower level of risk than equity. 

Debt Funding Platforms

Convertible Debt

Convertible debt, or a convertible note, is a loan that can convert into equity. The holder of the debt can convert the notes into a specified number of shares of common stock in the issuing company or cash of equal value. It's a hybrid security with debt and equity-like features.

Convertible debt delays the need to perform a valuation as a startup, but it still provides the investors with potential impressive returns as well as an alignment of incentives.

How do you measure a startup's value? How do you know their idea or team has potential? It's hard for startups to answer questions like that without any form of established proof. But with convertible debt, startups do not have to answer those questions right away. Convertible debt is attractive because it allows startups to delay this issue.  

Convertible debt success: 

With a goal of $600,00 on WeFunder, Camperoo reached 100% of its goal using convertible debt. Emmie Chang, CEO and Founder of Camperoo,  set out to create a company that helps  parents discover the best camps for their kids As Camperoo contunies to grow they hope to be the new marketplace for all child activities.

Emmie Chang said she used convertible debt because "documentation is relatively simple and straightforward. We could also close each investor separately in a rolling close, with some flexibility in valuation caps (which increase over time). It also reduced legal fees and time to sign."

Convertible debt is a type of security frequently used by startups when raising seed capital. Fund Wisdom can help your startup raise money through our different aggregated crowdfunding platforms. If you are an entrepreneur interesting in starting a startup using convertible debt take a look at our startup page. If you are an investor and are interested in funding startups that use convertible debt, take a look at our investor page and find the right startup for you.

SAFEs This has also grown in popularity.

Security Token Offerings - Sell Crypto 

A Security Token Offering (STO) is a form of initial coin offering (ICO, or initial currency offering). It’s a type of funding using cryptocurrencies in a regulated fashion. In an STO, cryptocurrency is sold in the form of "tokens" or "coins" to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin, Ethereum, etc. The tokens sold are promoted as future functional units of currency and are done so following SEC-mandated rules. An ICO can be a source of capital for startup companies. Traditional paper-backed assets like equity shares or debts in a business present some transaction and liquidity issues. This type of business funding event in the form of a token can address some of these problems.

As seen from our data a few of the asset categories within equity are:

  • Token Debt Payable by Assets ("DPA")
  • SAFT (Simple Agreement for Future Tokens)

Coinlist is a platform that specializes in these offerings built from the AngelList team is a great source to find these ICO investment offerings.

Which one is for you?

The Small Business Administration (SBA) is a government backed program that can help in the process to raise capital via equity or securing loans and is a great place to start. Hopefully an understanding of the offering types and those being used helps determine where to go. Equity and debt investing platforms are lowering fees providing better rates online, lower fund management fees and transaction costs. When selecting a path to raise funds consider the type of business you are in, your current and future cash flows, profits, expansionary needs, and the creditworthiness of your founding team.

If you are considering debt financing a good place to start is with a business credit score. Supermoney and Kapitus offer up competitive rates. We have affiliate relationships with both. As businesses grow they typically employ a blend of both equity and debt financing to meet their needs. Which method of raising funds works for you? Share in the comments below.

Leave Your Comment