Debt or Equity?
Silicon Valley Bank
You need both. Do not substitute one for the other.
Use each component in the right way:
should be used in early rounds for R&D and product development
and in later rounds, for ramp-ups in sales and marketing and
should be used for working capital and to build the
usually follows equity.
Debt is cheaper than equity but always keep in mind that the equity
investors take greater risk, hence the potential for reward should
The sooner you
establish a banking relationship, the better. It
increases credibility and also creates a relationship for credit
What kind of banking
relationship is appropriate at what stage?
Types of Venture Finance
Financing: Key Documents
The funding package may contain various forms of finance. The three
main types are ordinary shares ("equity"), preference shares, and
Ordinary shares are proprietor's capital, and they normally
carry full voting rights. They also carry the greatest risk and
potentially the greatest reward, for two reasons. The first is that
they are rewarded in the form of dividends after all other costs
have been met. The second is that they are entitled to any surplus
that remains after all other claims to capital have been met if the
company is wound up. Certain classes of ordinary shares may carry
deferred or preferred rights in certain respects.
Preference shares give their holders certain rights in priority to
the ordinary shareholders, especially as regards entitlement to
dividends and entitlement to repayment of capital if the company is
wound up. They are normally rewarded at a fixed rate or dividend but may
have rights to participate in profits by way of further dividend. Except
in special circumstances, they do not normally carry voting rights.
Sometimes, preference shares carry conversion and/or redemption rights
enabling the holders either to convert their investment into ordinary
shares or to realize it at a some future date.
may be secured on the company's assets. In addition, they may be converted
later into ordinary shares. They rank ahead of shares for the repayment
of capital. The interest is at a fixed rate irrespective of the
company's profits or losses and may be subject to periodic review...
There are variations within each of these classes, and there may also be
other elements in the financing package.
Timing your Financing
Most popular strategy is staged financing. This is a process of timing
of financing to coincide with the achievement of a significant