Guide · Debt or equity
Borrow or raise? Debt vs equity for startups
A loan’s cost is fixed. Equity’s is paid at the exit, and it rises the better you do. Put both on one yearly rate and the choice gets simple. In our worked example, selling 10% of the company for $2M costs 32.0% a year at a $100M exit, more than twice a 15% loan.
Updated 26 October 2026 · Educational, not financial advice
Two costs on one scale
A loan’s cost is its all-in yearly rate: interest, fees, the final payment and warrants, as the one rate at which every payment is worth exactly what you received (the internal rate of return).
Cost of debt a year = (1 + monthly rate)12 − 1
Equity has no interest, but it isn’t free. Its cost is what the shares you sell will be worth at the exit, spread over the years until then:
Share sold = amount ÷ (pre-money valuation + amount)
Cost of equity a year = (share sold × (1 − later dilution) × exit value ÷ amount)1 ÷ years − 1
Pre-money is the company’s value before the new money; later dilution, how much later rounds shrink the stake before the exit. We leave tax out: interest is deductible, but a loss-making startup gets little from that today.
Why selling 10% costs 32.0% a year
The example company in Borrow or raise? is growing: $250K of monthly revenue, $120K of monthly burn, $1.2M in the bank and $4M raised last round. It needs $2M for growth that pays back in about 18 months. As equity, that’s $2M at an $18M pre-money valuation. As a loan, $2M at 15% a year all in over 36 months, the first 6 interest-only: $504K of interest, whatever the exit. We assume a $100M exit in 5 years, after later rounds dilute everyone by 20%.
$2M ÷ ($18M + $2M) is 10%; after later rounds, 8%, worth $8M at the exit. Turning $2M into $8M over 5 years is (8 ÷ 2)1/5 − 1 = 32.0% a year, against 15.0% for the loan. That’s equity’s cost if you hit your plan. If the company fails, it costs nothing; the loan still has to be repaid.
The exit where they cross
Equity’s cost rises with the exit; the loan’s doesn’t. Set them equal and solve for the exit:
Crossover exit = amount × (1 + cost of debt)years ÷ (share sold × (1 − later dilution))
In the example: $2M × 1.155 ÷ (10% × 80%) = $50.28M. Above it, debt is the cheaper money. Below it, equity is.
| Exit | Shares sold, worth | Equity, a year | Loan, a year | Cheaper |
|---|---|---|---|---|
| $25M | $2M | 0.0% | 15.0% | Equity |
| $50M, half the plan | $4M | 14.9% | 15.0% | Equity |
| $50.28M | $4.02M | 15.0% | 15.0% | Equal |
| $75M | $6M | 24.6% | 15.0% | Debt |
| $100M, the plan | $8M | 32.0% | 15.0% | Debt |
| $200M | $16M | 51.6% | 15.0% | Debt |
The crossover sits at about half the plan: get only halfway and the two cost about the same. Below $25M the shares end up worth less than the $2M they raised, so equity cost nothing extra. (We leave out liquidation preferences, which pay investors back first in a small exit.)
Can you carry the repayments?
Cheaper isn’t enough. A loan is repaid on schedule whatever happens, out of the same cash you’re burning. Here it’s interest-only at $23K a month for 6 months. Then you repay $66.7K of the loan a month plus interest, $90K at first. Cash going out jumps from $120K to $210K a month, up 75%.
The same $2M buys 9.3 fewer months as a loan, though 17.4 clears the tool’s 12-month floor. Two things still say borrow less. Size: lenders usually offer up to 35% of the last round or four months of revenue, whichever is more, so $1.4M here, not $2M. And lenders like about 12 months of cash without the loan: this company has 10, or 15 with $600K of equity alongside.
The mix that keeps the most
So borrow what you can carry and raise the rest. Five splits, at the same $18M pre-money and $100M exit:
| Borrow | Raise | Company sold | Worth at the exit | Loan interest | Months of cash | Fits |
|---|---|---|---|---|---|---|
| $0 | $2M | 10.0% | $8M | $0 | 26.7 | Yes |
| $1M | $1M | 5.3% | $4.21M | $252K | 20.8 | Yes |
| $1.4M | $600K | 3.2% | $2.58M | $353K | 19.3 | Yes, the most you can carry |
| $1.5M | $500K | 2.7% | $2.16M | $378K | 18.9 | No: too big |
| $2M | $0 | 0% | $0 | $504K | 17.4 | No: too big |
Borrowing $1.4M and raising $600K sells 3.2% of the company instead of 10.0%, so 6.8 points more stay yours: $5.42M of shares at the planned exit, for $353K of interest. They aren’t the same dollars (interest is paid over three years, the shares at the exit), but the gap is wide. The price: 7.4 fewer months of cash than all equity, and repayments whatever happens.
What’s normal in 2026
Our reading of public data as of October 2026 (sources below). Use it as a sense check, not a quote.
| What | Typical | What it means for you |
|---|---|---|
| Size | 20–35% of the equity round it comes with; some lenders go to 50% | The tool caps it at 35% of the last round, or four months of revenue. |
| Shape | 3–5 years, often 12–18 months interest-only | Interest-only months are runway; repayments aren’t. |
| Runway | About 12 months of cash without the loan. As runway, more than 3–6 months of burn in debt is usually too much | Debt stretches runway. It doesn’t replace the next round. |
| Cost | Venture debt funds about 13–16% a year all in, before warrants | See how to compare debt offers. |
| Warrants | A $1M loan: 0.10–0.25% of the company. $1M of equity at a $20M pre-money: about 5% | Small next to selling shares. |
| Investor returns | Targets of 25–35% a year near IPO, up to 50–70% at start-up | Why equity costs more when things go well. |
| Market | US venture debt: a record $68.8B in 2025, about 1,000 deals, median $5.5M | Lenders are active: get two term sheets. |
Before you borrow
- Price equity at a cautious exit. Work it out at half your plan too. In the example, that alone makes the two cost about the same.
- Match the loan to money that comes back. Stock, receivables and marketing with a known payback suit a loan. Product, R&D and new markets suit equity.
- Keep 12 months of cash after repayments. If the plan slips, the repayment dates don’t.
- Borrow alongside the round. Lenders offer most when investors have just put money in. Sign then, and draw only what you need.
- Read the default clauses. A material adverse change clause lets the lender call a default on its view of your business; an investor abandonment clause, if your investors won’t fund you further. Ask to remove or narrow both.
Run your own numbers
Borrow or raise? does this on your numbers. Free: the answer, what each costs a year, the exit where they cross, and the fit checks. Pro adds the mix that keeps the most of your company, months of cash with each if nothing improves, what to say to investors and lenders, and Excel with live formulas and PDF. It comes with Debt Offer Comparator Pro, a one-off $39, or Round & Dilution Planner Pro, $79. All three tools are $99.
Sources
- Runway Growth and PitchBook, 2025–2026 Venture Debt Review
- Carta, Venture debt, 2025
- Mercury, The venture debt term sheet, updated 2026
- Kruze Consulting, The dangers of venture debt, updated 2025
- Stifel Bank, More runway, less dilution, 2025
- Aswath Damodaran, NYU Stern, Valuing and pricing young and start-up firms
The worked example’s numbers come from Borrow or raise?’s example company. Educational estimates, not financial, legal or tax advice. Equity’s cost assumes you reach the exit you plan for; check any loan against the lender’s schedule and the signed agreement.