Debt vs Equity: Would you rather own 100% of a small cake, or 10% of the bakery that produces thousands of cakes every day?
That’s the kind of decision every entrepreneur eventually faces. How you choose to fund your business doesn’t just decide how much money you have to grow it also determines how much control you’ll keep, how much risk you’ll shoulder, and how wealthy you’ll ultimately become if things go well.
Some entrepreneurs sell part of what they’re building to fuel growth. Others borrow money to expand but keep ownership. And then there are those who go the hard way building it all by themselves, dollar by dollar. The truth? There’s no perfect choice.
In this article, I’m going to break down how businesses actually get funded, the pros and cons of different financing methods, and the long-term consequences of each. By the end, you’ll know exactly how debt, equity, (Debt vs Equity) and bootstrapping work and which might be right for you.
Why Every Business Needs Capital
Every business, no matter how small or large, needs money to grow. This “fuel” is what we call capital.
Broadly speaking, there are only two main ways to get it:
- Debt – borrowing money you’ll eventually pay back, with interest.
- Equity – selling part of your company in exchange for cash.
And whichever path you choose, you’re also choosing:
- Who controls your business
- How much risk you take on personally
- How much of the pie you’ll keep when success comes
A lot of entrepreneurs underestimate this. They think money is money. But the funding structure from day one can be the difference between becoming truly wealthy or ending up just another employee in a company you started.
The Big Picture: What Companies Actually Do
According to CB Insights, around 70% of early-stage startups raise capital through equity they sell a piece of their company. It makes sense: most startups at that point don’t have much in terms of revenue, assets, or creditworthiness. Banks won’t lend to a dream scribbled on a pitch deck.
But fast forward, and things change. Over 90% of S&P 500 companies (the largest corporations in the US) use debt as their main source of funding. These are some of the wealthiest businesses in the world, and yet they still borrow money.
Take Apple, for example. At the end of 2023, Apple had a staggering $162 billion in cash reserves. Yet it still issues billions in corporate bonds. Why? Because for them, debt is cheaper than equity. Debt doesn’t dilute ownership, and interest payments are tax deductible.
This means Apple can borrow billions, lower its tax bill, and still keep full control.
So here’s the golden rule:
- Equity buys you help.
- Debt buys you control.
Both can work out beautifully or backfire dramatically. Let’s look at each in detail.
How Equity Funding Works
Equity is the classic startup path. You trade ownership of your company in exchange for cash. If your company takes off, both you and your investors win big. This is the entire premise of shows like Shark Tank.
But here’s the catch: every time you raise money, you give away a slice of ownership. Slowly, your power gets diluted. By the time the big payday arrives, you might not even be the one calling the shots anymore.
In fact, it’s possible to get fired from your own company. That’s exactly what happened to Steve Jobs at Apple. He built the company from scratch, but after Apple went public, outside investors had more control than he did. In 1985, following a power struggle, Jobs was removed.
That’s the ultimate risk with equity: the more you give away, the less power you keep.
The Equity Funding Journey
Equity funding usually unfolds in stages:
- Seed Capital – This is the very first money, often from angel investors or early-stage venture capital firms. You don’t have traction yet just an idea and ambition. The funds go into building prototypes and testing the market.
- Series A – Now you need to prove the business works. Series A funding is all about product-market fit. You need real users, paying customers, and evidence that your model can scale.
- Series B – At this stage, it’s about scaling what works. You’ve got revenue and a business model, but now you need capital to hire aggressively, expand into new markets, and build infrastructure.
- Series C – This is pre-IPO territory. Series C is about dominating your category, acquiring competitors, and preparing for the public market. At this point, you’re raising tens or even hundreds of millions, often from private equity and hedge funds.
- IPO (Initial Public Offering) – The final equity move. You list your company on the stock exchange, making it available for anyone to invest in. IPOs are huge capital-raising events, Alibaba raised $25 billion in one day. Facebook raised $16 billion. Even modest IPOs can bring in hundreds of millions.
But once you’re public, the pressure never stops. You must report quarterly earnings, meet analyst expectations, and live under constant public scrutiny. One bad quarter can wipe billions from your valuation. In 2022, Meta lost $230 billion in a single day after disappointing results.
The takeaway?
Equity funding can make your company massive. But the more you raise, the more you give up.
How Debt Funding Works
Debt is different. Instead of giving away ownership, you borrow capital and repay it later. Used wisely, debt can accelerate growth while allowing you to keep full control of your company.
This is why even the world’s richest companies borrow money. It’s not because they need it, it’s because debt is a powerful financial tool.
Types of Debt Funding
- Business Loans – The classic option. You get a lump sum upfront and repay in installments with interest. Banks love stability, so this only works if you already have revenue or assets to back the loan. The downside? Pressure. Repayments don’t stop even if sales slow down.
- Lines of Credit – Think of this as a safety net. You’re approved for a certain amount (say $1 million) and can draw from it anytime, paying interest only on what you use. Lines of credit help cover cash flow gaps for example, delivering a big order before a client pays.
- Corporate Bonds – For larger companies, this becomes the tool of choice. Instead of asking a bank for a loan, you create your own. Apple might issue a bond offering 3.5% interest over 10 years. Pension funds, hedge funds, and investors buy them, giving Apple billions upfront. It’s cheaper than equity and allows Apple to keep full control.
The bigger and more trustworthy your company, the cheaper your debt becomes. That’s why investors line up to lend to Apple but might hesitate at lending to a small car repair shop.
Bootstrapping: Building It All Yourself
There’s one final path many entrepreneurs take bootstrapping. This means you don’t raise money from anyone. You simply use your own savings, revenue, and creativity to grow.
Bootstrapping is the default for most small businesses and side projects. You start lean, prioritize profit over scale, and reinvest every dollar you make. You wear every hat like sales, marketing, customer service and slowly, the business grows.
The upside?
- No investors to answer to.
- No debt weighing you down.
- 100% control and ownership.
The downside?
Growth is slower, and it all depends on your ability to stretch limited resources.
But if it works, the rewards are incredible. You built something from scratch, and it’s entirely yours. If it fails, you regroup and move on without owing anyone.
So, Which Path Should You Take?
Here’s the truth: there’s no universal right answer. Each option has trade-offs.
- Equity: Ideal for startups chasing massive scale fast. You trade ownership for growth, but risk losing control.
- Debt: Perfect if you already have a stable business and want to grow without giving up equity. You maintain control, but you carry repayment pressure.
- Bootstrapping: Best for entrepreneurs who value independence. Growth is slower, but everything remains yours.
Think about your vision. Do you want to run a giant company, even if it means sharing ownership? Or do you prefer building something smaller but fully yours?
Final Thoughts on Debt vs Equity:
The way you fund your business will shape its future and your future with it. Equity can make you rich but powerless. Debt can keep you in control but adds risk. Bootstrapping keeps everything yours, but the journey is harder.
At the end of the day, entrepreneurship is all about trade-offs. The important thing is to choose intentionally, knowing exactly what you’re giving up and what you’re gaining.
Because whether you own 100% of a small cake or 10% of a massive bakery, the real win is building something that lasts. I hope the confusion regarding debt vs equity has been resolved.
If you enjoyed this guide and want more insights on money, investing, and building wealth, visit Forcefall.com for more in-depth articles and resources.
