Debt is cheaper when the business can service it and keeps founders in control. Equity is more expensive over the life of the company but does not require repayment out of cash flow the business does not yet have. The businesses that get this call right have someone in the finance seat modelling both sides before the term sheet, not after.
What each one costs
Debt’s cost is visible upfront: an interest rate, a repayment schedule, and usually a covenant or two attached to it. What it does not cost is ownership. Equity’s cost is invisible at the point of raising, because there is no invoice for it, but it compounds: every dollar of value the business creates from here, the new shareholder owns their percentage of it, permanently. For an early-stage business without predictable cash flow to service a loan, that invisible cost is usually still the cheaper option, because debt taken on too early just moves the risk from the cap table onto the bank account.
Almost every conversation I have with a founder or CFO includes the same challenge: ‘Cashflow. Cashflow. Cashflow.’ In a start-up or scale-up, cash flow is always tight,[2] and a fixed repayment schedule has to be met out of exactly that cash.
Why this is a finance-seat decision, not a founder gut call
A good finance person changes the direction of a business precisely through calls like this one: hiring, investment amounts, and investment type, debt against venture equity, among them.[1] Modelling both paths, what a debt facility does to monthly cash flow against what an equity round does to the cap table and the next round’s pricing, is finance-seat work.
That does not mean the first finance hire has to arrive able to do all of it. One business I spoke with had investors expecting a candidate who could run debt models, understand capital markets and oversee the GL, at a salary band where that person simply doesn’t exist: a unicorn on a pony budget. More often than not the solution is smarter hiring. They brought in someone with solid accounting fundamentals, and the pricing, modelling and debt structures were learned in the role. It worked because the business adjusted its expectations and invested in training.[3] What matters is having a finance leader who helps the founder think through a capital raise 3 months before they need to start it,[4] not after the term sheet arrives.
Tom Hunter's view: When I asked what investors actually look for in a startup’s finance function, the same pattern came up every time. Investors read your finance function as a proxy for how you run everything else. If it’s chaotic, they assume the rest of the business is too. (LinkedIn, August 2026) I heard a second-hand example from a VCFO: a business gearing up for a Series A had conflated GST into its ARR. As I said on Builders & Doers, “ARR was way off compared to what it actually was. And so in the end the lead investor ended up pulling out.” They didn’t have the right controls and metrics in place to give an accurate description of where the business was at. (Builders & Doers, September 2026; video at 4:40)
| Debt financing | Equity financing | |
|---|---|---|
| Dilution | None. Ownership stays where it is. | Permanent. Investors own their percentage of everything the business builds from here. |
| Repayment | Fixed schedule, regardless of how the business performs. | None. No obligation to repay if the business underperforms. |
| Speed to close | Usually faster, especially against existing revenue or assets. | Slower: diligence, negotiation, legal documentation. |
| What it needs to work | Predictable cash flow to service the debt. | A growth story investors believe in enough to price. |
One specific debt structure built for VC-backed startups: venture debt, and when it actually fits.
Every equity round changes the cap table; I set out why keeping that clean is the fastest exit-readiness signal there is.
Common questions
Is debt or equity cheaper for a startup?
Debt is usually cheaper if the business has predictable cash flow to service it, because the cost is fixed and ownership does not move. Equity has no repayment obligation but is more expensive over time: every dollar of value the business creates from that point, the new shareholder owns their share of it permanently.
Can a startup raise both debt and equity?
Yes, and most Australian scale-ups end up doing both at different stages. A common pattern is an equity round to fund growth, then a debt facility (often venture debt) layered in afterwards to extend runway without diluting further.
Who should model the debt vs equity decision?
The finance seat, not the founder alone. A good finance hire models both paths properly, what a debt facility does to cash flow under a downside scenario against what an equity round does to the cap table and future pricing, before the founder has to choose.
Why do early-stage startups mostly raise equity instead of debt?
Debt requires predictable cash flow to service the repayment schedule, which most pre-revenue or early-revenue startups do not have. Taking on debt too early moves risk from the cap table onto the bank account, which is why equity, despite its long-run cost, is usually the safer early call.
References
- A pattern I see directly in the businesses I recruit into: a good finance person changes the direction of the company through exactly these calls, hiring, investment amounts, and investment type, debt against venture equity, among them.
- Tom Hunter on LinkedIn in July 2025, on cash flow as the challenge that comes up in almost every founder and CFO conversation.
- Tom Hunter on LinkedIn in October 2025, on investors expecting debt modelling from an early finance hire, and hiring for fundamentals instead.
- Tom Hunter on LinkedIn in July 2026, on finance as the founder’s commercial partner.
These guides set out how we see it, drawn from the searches we run and the finance leaders we work with. They are general information about the market, not financial, accounting or legal advice, and they are no substitute for advice on your own circumstances.