Every founder eventually asks some version of the same question: should I raise equity, take on debt, or do both? Most founders answer it by comparing which instrument looks cheaper on paper. That is the wrong question. The real question is whether the return you can generate on a dollar justifies what that dollar actually costs you.
This came up in a recent webinar, From Capital Planning to Capital Execution, with Kristian Marquez, founder and CEO of FinStrat Management, and Carlos Antequera, co-founder and CEO of Novel Capital. Here is the framework they laid out.
The basic distinction
Equity means selling a portion of your company. As Kristian put it, that investor lands on your cap table, and until they no longer hold shares, you are proverbially in bed with them. Debt is different. It is non-dilutive, so the lender is not on your cap table, but you carry a fiduciary responsibility to pay back the capital plus interest.
Doing both at once is common. Kristian sees it regularly at FinStrat: clients who close a round of equity financing and put a debt facility in place at the same time, using each instrument for what it is actually good at rather than picking one and forcing it to do everything.
Cost of capital, explained through a mortgage
Kristian’s favorite way to make this concrete is a mortgage. If you own a home, the interest rate you locked in depends entirely on when you bought. Rates moved as the Federal Reserve moved, and pre-pandemic rates were meaningfully lower than they are today. He was careful to say the exact numbers were rough, so the specific rate matters less than the idea.
The point is not that a higher cost of capital is good or bad. It is a number. On its own it tells you nothing. It only becomes useful once you weigh it against the return that capital lets you generate. If your financial metrics show you are getting a strong return on what you spend to acquire a customer, you can cost-justify a higher interest rate, because you are generating enough to cover the expense and still turn a profit.
Why profitable giants still borrow
If low rates were the whole story, the most cash rich companies in the world would never touch debt. They do anyway. Kristian pointed out that Microsoft, Apple, and Meta all issue bonds despite holding billions of dollars in cash on their balance sheets. Their businesses perform well enough that they can leverage that capital even better by taking on debt, and in doing so, avoid further diluting their investors. That is exactly why lenders like Novel become valuable to founders: you can generate a greater return while holding on to more ownership of your company.
The 20 cent framing
This is where Carlos’s stage argument comes in, and it is the core of the whole framework.
Early on, especially for a tech company carrying R&D risk, you may need equity just to reach product market fit and build the kind of unit economics you can have confidence in. That is the riskiest point in a company’s life, and equity is priced accordingly. When you take on equity at that stage, VCs and other equity investors are underwriting to something like 10 to 1 or 20 to 1 on the dollar they give you. That is what you are effectively paying out if the venture succeeds and you exit.
Once you move your company up in maturity and de-risk those elements, you have a real choice. You can go get more equity and pay that same 10x or 20x expectation, or, as Carlos frames it, you can ask what your unit economics actually support. In his words: “If somebody gives you a dollar, and you have confidence around your unit economics that you can generate three, four, five dollars, you would give me 20 cents all day long.”
That confidence matters, and it cuts both ways. If you do not yet have that level of confidence in your unit economics, Carlos was clear that it simply means there is more work to do in the business first, and that is fine.
Not all debt is equal
Founders often anchor their expectations on the cost of capital they know from their own lives, a mortgage or a car loan, where there is liquid collateral behind the loan. Your house is the collateral on a mortgage. A company at its earliest stages, before it is profitable, usually does not have that same liquid collateral unless it owns buildings or machinery. Because of that difference in risk, the cost of business debt is going to run higher than what founders are used to seeing on consumer loans.
Carlos flagged two levers, beyond the stated APR, that change what a debt instrument actually costs.
Warrants. Venture debt sometimes carries warrants that have the opportunity to convert to equity at a later stage. That is an additional cost sitting behind the number on the term sheet.
Personal guarantees. A lender might offer a lower APR, but require a personal guarantee from you on top of the business. If there is no personal guarantee and no personal risk to you, the cost looks different than if there is one.
Carlos’s takeaway: understand that there are a lot of flavors of debt, and when you are comparing two offers, sometimes it is not apples to apples.
Get a second set of eyes
Both Kristian and Carlos land on the same practical advice from different angles.
Kristian’s version: bring in advisors, whether that is a CFO or a lawyer who can evaluate a term sheet, because concepts like covenants and liquidation preferences take real context and experience to judge. Most investors he has worked with are good people, but he has seen the exception. He recalled a client at FinStrat who put convertible notes in place with angel investors early on, before she knew better. When she eventually sold her company, she did well, but the size of the returns those angel investors walked away with was out of proportion to the risk they had actually taken.
Carlos’s version is the practical one: founders who have either a full time CFO, a fractional CFO, or advisors supporting them tend to be more prepared for these conversations and tend to move faster through the process. That speed matters, because raising capital takes real time away from the main part of the job, which is running and building the business.
The framework, in short
Do not ask which instrument is cheaper on paper. Ask what the capital will actually let you do, and whether the return you expect from it justifies the true cost, warrants and personal guarantees included. Early on, when you are still de-risking the business, equity may be your only real option, and that is fine. Once you trust your unit economics, non-dilutive capital is worth a real look. And whichever path you take, do not evaluate it alone.
