Equity vs Debt: How Founders Can Retain Control of Their Startups!
- Jasaro.in
- Jul 26
- 4 min read
Updated: Aug 20
If you're an aspiring entrepreneur or early-stage founder trying to decide whether to raise equity, take on debt, or blend both, this post will give you a clear, numbers-driven breakdown, and a funding strategy you would need.
Let’s dive into why the smartest founders aren’t just raising money, they’re raising it right.
But, first the basics ...
Debt Financing vs. Equity Funding
Debt and equity represent different ways for the businesses to raise capital (funding.)
💸 Equity Funding
Equity funding involves selling ownership shares in a company in exchange for funding, without a repayment obligation.
Investors (typically VCs or angels) give you capital in exchange for ownership, which means you don’t repay the money, but you give up a piece of the pie (stocks.)
No repayment obligation - money can be fully reinvested in growth.
Brings strategic investors and networks.
Investors share in profits (and losses).
Dilution occurs with every new round.
Pressure to scale fast to meet investor expectations.
Board oversight and potential misalignment.
🏦 Debt Funding
Debt funding involves borrowing capital from lenders like banks, NBFCs, or Revenue-based Financing (RBF) providers, with an obligation / promise to repay the loan plus interest over time.
No dilution - founders keep 100% ownership.
Retain control of strategic decisions.
Forces capital efficiency and profitability focus.
Repayment is mandatory, typically monthly, regardless of performance.
Typically requires stable, predictable revenue.
Slower growth if not supplemented with equity.
Equity vs Debt: Pros and Cons of Each.
In short: Equity is a rocket, while Debt is a ladder. Both will get you higher, debt just gives you more control over the climb.
Two Founders (A & B), Two Capital Paths
Let’s start with a hypothetical, but highly realistic, scenario:
Both founders launch a SaaS business doing ₹5 Crore ($0.6 Mn) in ARR.
Both hit ₹100 Crore ($11.6 Mn) in revenue after 6–9 years.
One raises ₹165 Crore ($19.1 Mn) and ends up with ₹410 Crore ($47.5 Mn).
The other raises just ₹26 Crore ($3 Mn), and walks away with ₹600 Crore ($69.4 Mn), and is wealthier by ₹190 Crore ($22 Mn.)
How? Welcome to the unspoken truth behind startup funding, where more capital doesn’t always mean more wealth.
Founder A: The Equity-Funded Path
Series A: ₹15 Crore ($1.8 Mn) at ₹50 Crore ($5.8 Mn) pre-money ➡ 23% dilution.
Series B: ₹50 Crore ($5.8 Mn) at ₹200 Cro pre-money ($23.2 Mn) ➡ another 20% dilution.
Series C: ₹100 Crore ($11.6 Mn) at ₹500 Crore ($58 Mn) pre-money ➡ 16.7% more gone.
By the end of 3 rounds, Founder A owns just 51.3% of the business.
Yes, the capital accelerated growth, hitting ₹100 Cr ARR ($11.6 Mn) in about 6–7 years at a 25% CAGR.
If the final valuation at exit is ₹800 Crore ($92.6 Mn), 51.3% of ₹800 Crore ($92.6 Mn) = ₹410 Crore ($47.4 Mn).
Founder B: The Debt-Funded Path
Round 1: ₹3 Crore ($0.35 Mn) in revenue-based financing (RBF) ➡ 0% dilution.
Round 2: ₹8 Crore (~$1 Mn) RBF at 25 Crore ($2.9 Mn) ARR ➡ again, 0% dilution.
Round 3: ₹15 Crore (~$1.8 Mn) term loan at 12% interest ➡ still no dilution.
Without giving up equity, Founder B grows slower, reaching ₹100 Crore ($11.6 Mn) ARR in 8–9 years at 23% CAGR.
At a 6x revenue multiple, the exit valuation is ₹600 Crore ($69.4 Mn.)
Here’s the kicker: they still own 100% of it i.e. ₹600 Crore ($69.4 Mn.)
Debt doesn’t dilute your equity. If you’re planning to raise equity later, retaining control now pays off 10x down the line.
Equity vs Debt: Let’s Break Down the Real Cost.
Despite raising 84% less, Founder B ends up ₹190 Crore ($22 Mn) richer.
Why? Because growth rate differences (2% CAGR) don’t matter nearly as much as ownership dilution over time.
Equity can feel like a cheat code: capital up front, aggressive scaling, and validation from top-tier VCs. But it’s a double-edged sword. Every round chips away at control, and wealth.
Founders chasing growth at all costs often don’t realize they’re slowly becoming employees in their own company.
On the flip side, debt demands discipline.
Growth is slower, plus you need strong fundamentals, positive unit economics, retention above 85%, and healthy cash flows.
But, you keep your cap table clean, retain full ownership, and your upside intact.
When Debt Financing Works Beautifully?
Debt Financing isn’t always the answer, but when it works, it works really well.
Here's when you're ready for it:
🔼 15%+ Monthly Revenue Growth (for 6+ months)
💸 CAC Payback Under 12 Months
🔁 Retention Above 85%
🧯 Low Burn Rates and Efficient Operations
Revenue-based Financing (RBF) or term loans can help you bridge inflection points, run capital-efficient experiments, or delay equity until you actually need it.
Hybrid Capital: The Best of Both Worlds
Let’s be real, most companies will need both debt and equity at different stages. The trick is in timing and discipline. Here's a smarter strategy:
1. Use Debt Early to Prove Product-Market Fit.
Don’t dilute at the idea stage. Leverage RBF or small working capital loans to prove traction, test monetization, and build early MRR.
2. Raise Equity Around Milestones.
Only bring in equity when you’ve hit clear milestones: product-market fit, predictable CAC, positive unit economics. This minimizes dilution and maximizes valuation.
3. Preserve Optionality.
You don’t know the future, so raise only what you need.
Build buffers. Optimize for control, compounding, and liquidity events on your terms.
As one wise founder put it:
“Smart capital allocation beats more capital. Every time.”
Funding isn’t just about speed, it’s about what you want to build, who controls it, and how much of it you own when it matters most.
Time can be more important than money, but ownership is forever.
Key Takeaways for Founders
🚫 Don’t default to equity just because “everyone’s doing it.”
💰 Raising less can sometimes leave you with more.
📉 Dilution adds up, don’t ignore second and third-round effects.
💡 Debt financing is powerful when your fundamentals are strong.
🧠 Think in decades, not demo days.
Whether you’re building a rocket ship or a long-term cash flow engine, capital is a tool, not a badge of honor.
So next time you’re considering that term sheet, ask yourself: "Am I raising the right money for the right reasons at the right time?"
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