What is the true cost of equity?
Unlike debt, equity has no fixed interest rate, but it has an implied cost that depends on your exit valuation. If you give away 20% of your company for £200,000 and exit at £10m, your investor receives £2m, an implied cost of £1.8m on a £200,000 investment. At higher valuations, equity becomes dramatically more expensive than debt.
When is debt better than equity?
Debt is generally better when your business has predictable cash flow to service repayments, you expect a high exit valuation making equity expensive, and you want to retain full ownership and control. Debt is worse when cash flow is uncertain, repayments would constrain growth, or you need more than capital from your investors.
When is equity better than debt?
Equity is better when your business is pre-revenue or early stage with unpredictable cash flow, when your investors bring strategic value beyond capital, or when you expect a modest exit that makes equity relatively cheap. Many businesses use a combination: equity for early-stage risk capital and debt once revenues are established.