Various methods exist for financing a new business or enterprise. Most financing, however, falls into two broad categories: debt or equity. Debt financing is when a business seeks a loan from a bank or other entity (or an individual) for money to capitalize a new business or new endeavor within an existing company. In the case of debt financing, the transaction is typically memorialized in the form of some kind of promissory note to be repaid according to the terms of the note. What distinguishes equity and debt financing is that with debt financing, the lender does not obtain any ownership in the businesses. The only obligation the business has to the lender is to repay the funds according to the terms of the note.
In contrast, equity financing entitles the investor to an ownership interest in the business in exchange for its financial contribution. Equity financing is governed by various documents and securities laws depending on the type of transaction and can be as simple as a few founders to as complicated as an initial public offering. In an upcoming series of posts the various stages in the start up financing life cycle focused on equity – bootstrapping, friends and family, seed, series, and exit – will be further examined to provide a more in-depth look at each.