Question

Explain why a startup might choose to issue equity instead of debt. Describe the nature of the equity. [Hint: When you supply financing (debt or equity) to a firm, what make it pay you back?]

Answer 1

Equity is preferred choice of the startups in their initial stages as they do not have access to easy funding.With the help of equity they improve on their prodeuct,hire experienced professional from industry,increase their marketing budget,expand their category portfolio,improve customer service etc.Following are the benefits of equity funding:

i)Equity investors gives funding when the startup has just started and needs funds to improve on their product,expand its reach and customer base etc.

ii)In case of equity funding,founders of the startups need not have to worry about repaying the money back.Founders and equity investors.Fouders and equity investors are sitting on the same boat and investors are looking for their high value of exits.These exits can be in the form of next round of funding with higher valuation,acquisition of the company and IPO(i.e. company going public on  stock market).