What's the difference between debt and equity?
The biggest difference is the risk & reward. Debt is slightly less risky for investors, but there is also much less upside. Equity is riskier, but potentially much more lucrative.
Debt. Investors lend the company money today in exchange for more money tomorrow. Investors are not shareholders, although they do have a right to company assets if the company goes under. We have two template debt contracts: Simple Loan and Revenue Share.
- Equity. Investors buy shares or units in the company in exchange for ownership. Investors earn a return if the company is acquired, goes public on the stock market, or pays dividends. We offer two template equity contracts, a SAFE and a Convertible note. There are other ways to structure an equity deal; if the SAFE doesn't fit your needs, your lawyer can draft a custom contract for you. Some examples include Preferred Stock or LLC Ownership Interests.
While there are exceptions, we've seen equity offerings perform better on Wefunder. About 90% of our investments are in equity agreements.