Bootstrapping or Equity Funding: Which Is Better for Your Business?

What is equity funding?

Jen Young, co-founder and chief marketing officer (CMO) of Outdoorsy, says equity financing means trading your equity in the company for cash from investors, such as angel investors and venture capitalists. You raise capital by selling shares and collecting funds from the public in exchange for part ownership of the company. 

Equity funds may come from family and friends or by issuing an initial public offering. The process of equity financing must be in line with government regulations.

Pros of equity funding

Equity funding has distinct advantages, including the following:

• Faster business growth: Equity funding helps you grow your business faster. You’re less strapped for cash and have investors who can help you improve your venture. “An infusion of working capital [can] make growing a startup much easier,” noted Nishank Khanna, CMO at Clarify Capital. “Apart from the capital, an investor also helps connect a founder to people in their network.”
• No interest payments: With equity funding, the business doesn’t pay interest for the money it receives. This is essential for startups that may not be in a position to bear the burden of debt.
• No liability: If the business is unsuccessful, the cost of liability lies with all shareholders, not one individual. 

Cons of equity funding

Equity funding isn’t ideal for all businesses. Consider the following cons of equity funding: 

• Ownership dilution: With equity financing, you give up a portion of ownership in your business. “The equity comes from the founders and this trade dilutes the founder’s ownership in their company,” Young explained.
• Shared decision-making: Individuals who buy shares from a company may demand to be involved in the company’s decisions, such as how the money is spent or where it is invested. 
• Leadership accommodations: If business owners give away enough equity, the investors may ask for board seats and preemptive rights. You may have to navigate incompatible leadership styles and company visions. 
• Shared profits: Your investors are rightfully entitled to a share of your profits. 

What is bootstrapping? 

When starting a business, some entrepreneurs eschew funding options like investors, crowdfunding and bank loans and finance their venture independently. 

Bootstrapping may involve financing your startup with credit cards or using personal savings. “You are completely self-funding your business when you decide to bootstrap,” explained Deborah Sweeney, CEO of MyCorporation. “This means you are not taking out loans or crowdfunding or getting investors involved.”

Bootstrapping also involves using existing resources, such as your personal computing equipment and space in your home, to minimize startup costs. You might also buy supplies from companies that offer discounts and negotiate trades with vendors and clients.

Pros of bootstrapping

Bootstrapping brings several advantages, including the following: 

• Business ownership: With bootstrapping, you’re accountable to no one and own your business independently. “The main advantage of bootstrapping is that you get to keep 100 percent equity ownership of your business and don’t take on any debt,” Khanna explained.
• Sense of accomplishment: According to Sweeney, the greatest advantage of bootstrapping is that it allows you to discover what you’re truly capable of. “You can step back and marvel at what you’ve done once you’re on the other side,” Sweeney noted.
• Good spending habits: Your company will form better spending habits in the long run if you rely on the business’s minimal resources. You learn to survive and thrive with minimal debt and enjoy the benefits of excellent spending behaviors as you grow.

Cons of bootstrapping

Bootstrapping isn’t without disadvantages, including the following: 

• Risk: Perhaps the biggest bootstrapping disadvantage is the personal risk you undertake. “Bootstrapping is not for the faint of heart,” Sweeney cautioned. “It requires a great deal of budgeting and discipline to do. There’s also no guarantee that your hard work will pay off, which is the risk every entrepreneur faces when they decide to start a business.”
• Limited resources: By its very nature, bootstrapping relies on limited resources. However, limited resources can hamper business growth. When demand exceeds your production capacity, your clients might seek competitors that can meet their needs.
• Liability: If you bootstrap, you’ll bear all the liability if your business fails or faces economic challenges. Natural disasters or calamities may result in significant losses and you are obligated to handle any adverse situations alone. 

Is bootstrapping or equity funding better for your business?

Bootstrapping and equity funding have distinct advantages and disadvantages. Deciding between these funding methods depends on your business, its development stage and the founders’ goals. 

Consider the following advice when deciding between bootstrapping and equity funding: 

You should use bootstrapping if:

• Your business can grow sustainably with your resources and revenue.
• You want complete ownership and total control in business decision-making.
• You prioritize generating profit instead of rapid growth.
• Your target market is well-defined and accessible without significant external funding. 

You should use equity funding if: 

• Your business needs significant funding and has the potential to expand quickly.
• You require specialized knowledge or connections that investors can provide.
• You seek rapid expansion and want to dominate the market share.
• Your business operates in a large, competitive market or is disrupting an existing industry. 

Bootstrapping and equity funding may be viable options at various stages of your business’s lifecycle. For example, your startup may bootstrap in the early days to prove the veracity and potential of your business idea. After your business gains traction, you may opt for equity funding to scale up your operations.

Funding your business is a personal decision

Every business is unique and follows a different path. While bootstrapping may work for one company, it may be impossible for another.

Before funding your business independently, Sweeney recommends speaking with a financial professional. “I can’t say bootstrapping is the best option for every entrepreneur and a financial professional can assist you in determining whether or not you can and will be able to bootstrap on your own terms,” Sweeney advised.

If you decide to go the equity funding route, Young recommends picking your investors wisely.

“They will be with you for the entire journey and you could be with them for a long time,” Young cautioned. “Make sure there is a good fit in terms of vision, strategy and direction.”

Gem Siocon contributed to this article. Source interviews were conducted for a previous version of this article.