What is The Difference Between Equity & Debt Capital For Women

Equity capital, unlike debt capital, is when someone or some company invests in a company in return for shares or stock in that company. Angel investing is generally done as such an equity investment. This money does NOT need to be paid back to the investor.

Rather, the investor generally gets paid when there is a liquidity event, which is the event through which the company “cashes out” such as being sold to another company or having an initial public offering or IPO. Note that a liquidity event is also known as an “exit.”

In some angel investments, angel investors can be paid dividend payments or profit sharing over time, and sometimes angel investments are structured as convertible notes (loans that can convert into equity – this is discussed in more detail later).

As you might imagine, equity capital is much riskier to investors than debt capital. With debt capital, lenders (typically banks) will receive interest and principle payments from the businesses they lend to, and earn perhaps 10% on their money with a relatively low risk profile. That is, due to their review process, the lenders feel that there is a high likelihood that the company will be able to repay the loan.

Equity capital is very different since the likelihood of a liquidity event is relatively low. However, when this does happen, investors can receive 10 times, 100 times or even 1,000+ times their money back.

Note that with equity investments, investors also believe that there is a strong likelihood that their investments will succeed, but they do understand that there is more risk involved than with most debt investments.

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