When to use debt over equity and vice versa

Case 1: Predictable investments with clear ROI

The clearest use cases for debt involve customer acquisition. 

You've run enough campaigns, hired enough salespeople, and tracked enough cohorts to know your unit economics. You know what a customer costs to acquire, how long they take to become profitable, and what their lifetime value looks like. This predictability makes debt the obvious choice.

Example: CAC payback with known timelines

You are a SaaS company. Your data shows that customers become profitable after eight months. CAC is €1,200, monthly revenue per customer is €200, and gross margin is 75%. After eight months, you've recouped CAC and the customer generates profit.

You need €500,000 to acquire 400 new customers. Taking equity to fund this makes no sense because you're trading permanent ownership for temporary capital to acquire assets with predictable returns. 

Debt costs you interest over the repayment period, but you keep your equity. Once those customers turn profitable, they're funding your next growth phase without diluting your cap table.

If you want to see how this is displayed in real-life, read the Yetipay case study. 

Case 2: Ad spending with measurable returns

Performance marketing represents another ideal use case for debt. You're buying ads on Google, Meta, or LinkedIn. You know your conversion rates, your cost per acquisition across channels, and your customer payback periods. The math is straightforward.

A B2B software company running LinkedIn ads knows they convert 3% of demo requests into customers, demos cost €80 each, and customers have a 6-month payback at €300 MRR. They want to spend €200,000 over the next quarter to acquire 60-70 new customers. The returns are predictable enough to justify debt rather than trading equity for working capital.

The alternative means permanently diluting ownership to finance what amounts to an annuity with a known yield. It's expensive and strategically questionable.

Case 3: Sales hiring with forecasted productivity

Sales hiring works similarly when you can forecast productivity. You've hired sales reps before. You know their ramp time, quota attainment rates, and the revenue they generate in months 6-12. If you're hiring five AEs at €80,000 base salary plus commission, you can model the payback on that €400,000 investment.

A company hiring SDRs and AEs knows that after a 3-month ramp, each AE generates €30,000 in new MRR per quarter at 70% quota attainment. Five reps cost €400,000 annually but generate €600,000+ in new ARR after ramping. The returns are clear and debt makes sense.

Event sponsorship with estimated lead flow

Event sponsorships and conferences can justify debt when you have historical data. 

If you've sponsored Web Summit or SaaStock before, you know how many qualified leads you generated, what percentage converted, and what the average deal size looked like.

A fintech startup sponsoring a €50,000 booth at a major conference knows they'll get 200+ qualified leads based on previous years, 15% will convert to opportunities, and 20% of those will close at an average deal size of €25,000. The expected return is €150,000+ in new business. Using debt to finance participation makes sense because the math works.

Debt use cases and ROI predictability

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When to use equity over debt

Equity performs best when returns are uncertain, timelines are long, or outcomes depend on variables outside your direct control. If you can't reliably predict what you'll get back or when, you shouldn't be repaying capital on a fixed schedule.

Case 1: Unclear ROI and unpredictable outcomes

Product development and R&D sit firmly in equity territory. 

You're building features or exploring technologies without certainty they'll drive revenue. You might invest six months and €300,000 into a new AI-powered feature only to discover customers don't care or your implementation doesn't deliver enough value to command higher pricing.

A product company investing in an AI recommendation engine can't guarantee it will increase conversions by X% or support a price increase of Y%. The outcome depends on execution quality, market timing, and customer perception. Using debt here creates repayment pressure on an investment that might not pay back in the expected timeframe.

Case 2: Geographic expansion and market entry

Expanding into a new market represents another equity use case. 

Opening an office in a new country, hiring a local team, and building brand awareness involves significant upfront investment with uncertain returns. You don't know if your pricing model will work, if local competitors will be stronger than expected, or if regulatory hurdles will delay your timeline.

A SaaS company expanding from Germany to the UK might spend €500,000 on local hires, marketing, and operations in year one. Will they hit €200,000 ARR in that market within 18 months? Maybe. But "maybe" shouldn't be funded with debt that requires repayment regardless of outcome.

Case 3: Product experiments and innovation bets

Building entirely new products or testing major pivots requires equity because the risk profile doesn't suit debt. 

You're making a strategic bet, not executing a proven playbook. If it works, the upside could be significant. If it doesn't, you need the freedom to shut it down without a repayment obligation hanging over you.

A company testing a new vertical or customer segment can't predict adoption rates or willingness to pay with the accuracy needed to justify debt. These are strategic experiments where the cost of being wrong is acceptable, but only if you haven't committed to fixed repayments.

Equity use cases and risk profile

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Why funding structure should match purpose

Most founders don't think about funding in terms of purpose alignment. They think about how much they need and which investor will give it to them. This approach leads to expensive mismatches where your capital structure fights against the nature of your investment.

Define your use case before choosing capital

The first step is clarity. What exactly are you funding? Break it down by category: 

• Customer acquisition
• Headcount
• R&D
• Expansion
• Infrastructure

For each category, evaluate predictability. 

Can you model the returns? Do you know the timeline? Have you run this playbook before?

Once you know what you're funding, the capital structure follows. Predictable investments get debt. Uncertain bets get equity. It's not complicated, but it requires discipline to avoid defaulting to the familiar path.

Misaligned funding structures create compounding costs

Using equity to fund CAC payback means you're giving away ownership for assets that will generate predictable returns. You've essentially sold equity at a discount because you'll repay that value through customer revenue, but you've permanently diluted your cap table.

Using debt to fund R&D creates the opposite problem. You're committing to fixed repayments for an investment that might not pay back on schedule. If the project fails or takes longer than expected, you're still making payments. This creates cash flow pressure that could force cuts elsewhere or even jeopardize the business.

Your funding choices affect your next round

Your current funding structure impacts your next raise. If you used equity to fund working capital needs that should have been debt, you've diluted unnecessarily. 

When you raise your Series A or Series B, you're starting from a lower ownership position than you needed to be. Over multiple rounds, this compounds significantly.

If you overextended on debt and your revenue growth didn't match projections, you're approaching your next equity round from a weaker position. Investors see debt on your balance sheet and ask about repayment obligations. If your cash flow is tight because of debt service, you have less runway and weaker negotiating leverage.

Example scenario

A SaaS company at €3M ARR raised €1M in equity to fund customer acquisition they could have financed with debt. By the time they reached €8M ARR and raised their Series A, they'd given away 15% instead of 8-10%. That 5-7% difference translates to millions of euros in exit value if the company succeeds. The math compounds at each subsequent round.

Choose capital that matches investment characteristics

The framework is simple:

• High predictability, short to mid-term payback → Debt
• Low predictability, uncertain timeline → Equity
• Medium predictability → Evaluate tradeoffs

For medium predictability situations (like hiring sales reps in a new segment or testing a new marketing channel) you'll need to weigh the risks. 

If the downside is manageable and you can adjust quickly, debt might work. If failure would strain operations or take longer to recover from, equity makes sense.

No matter if it’s equity or debt: the goal is to use the right type of capital for each specific need. Many high-growth startups use a mix. They use equity for the long-term strategic bets and R&D and debt for the predictable growth investments that will pay back within 12-18 months.

Summary: When to use debt, when to use equity

• Debt works best for predictable investments where you can model ROI and payback periods: customer acquisition through proven channels, ad spending with measurable returns, sales hiring based on historical productivity
• Equity makes sense for uncertain bets with unpredictable outcomes: R&D, product development, geographic expansion, and strategic experiments
• Your funding structure should match your investment purpose; misalignment creates costs that compound over future rounds
• Using equity to fund predictable investments dilutes your ownership unnecessarily; using debt to fund uncertain bets creates repayment pressure on investments that might not pay back on schedule
• The strongest funding strategies use a mix: equity for long-term strategic bets, debt for short-term predictable growth

Q&A: When to use debt, when to use equity

What if I need both debt and equity for the same growth stage?

Most companies between €3-10M ARR benefit from using both. Raise equity for your long-term strategic investments (product roadmap, team building, market expansion) and use debt to fund your short to mid-term revenue-generating activities (CAC payback, proven channel scaling). This combination preserves equity while still accessing the capital you need to grow predictably. Structure them separately rather than mixing purposes within a single instrument.

How do I know if my investment is actually predictable enough for debt?

Ask yourself: Can I model the payback within a 3-month margin of error? Do I have at least 6 months of historical data to base projections on? If the answer is yes to both, you have predictability for debt. If you're guessing at conversion rates, LTV, or payback periods, your predictability isn't there yet. Run the channel or experiment at a smaller scale with existing capital first, gather data, then use debt to scale once you have confidence in the returns.

What happens if I choose the wrong type of capital?

If you used equity when debt would have worked, you can't undo the dilution, but you can avoid repeating the mistake in your next round. If you used debt and the investment isn't paying back as expected, focus on accelerating returns from that investment or finding other revenue to cover repayments while you course-correct. In severe cases, you might need to raise equity to pay down debt, but this is expensive. The lesson is to match capital to purpose from the start.

Does debt make sense if I'm planning to raise a Series A within 12 months?

Yes, often more than equity. If you raise debt 12 months before your Series A, use it to accelerate growth metrics (ARR, customer count, retention), and enter your Series A with stronger numbers, you'll raise at a better valuation. The debt repayments matter less than the valuation improvement you generate. You might dilute 20% instead of 25% because your metrics are 30-40% stronger. In this scenario, debt becomes a tool to optimize your equity raise timing and terms.

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