Expensive Money: Why Equity Costs More Than Loans

Grocery stores give out free samples, and the samples are never the point.

The point is that once you're standing there with a toothpick and a cube of cheese, you feel a little bit obligated. Not to the sample. To the person who gave it to you. You didn't plan to buy the artisanal cheese. You planned to buy milk and get out. But now there's a whole wheel of it in your cart, on sale, four for ten dollars, and you feel like you got a deal.

Nobody made you buy it. You just met someone offering something free, and free things have a way of turning into commitments you didn't price out ahead of time.

Founders do the same math wrong with money.

A loan feels expensive because you can see the number. Seven percent interest on $50,000, paid off over five years, and you know exactly what it costs you: about $10,000. Annoying, but knowable. Sell the company for a million dollars later and you keep $990,000.

Equity feels free because nobody hands you a bill. No monthly payment, no due date, no line item that stings every month. Someone gives you $50,000 for 10% of the business and it feels like the cheapest money in the room. You didn't have to pay anything back.

Except you did. You just paid it at the end, all at once, when it hurts the most.

Sell that same company for a million dollars and the investor takes their 10% — $100,000. Ten times what the loan would have cost you. You didn't feel it coming because nobody sent you a statement. It just showed up at the closing table and took its cut.

The cheapest money in the room is almost always the money you don't feel yourself spending yet.

That's not an argument against investors. It's an argument for doing the arithmetic before you take the sample, not after you're standing at checkout wondering how the cheese ended up in your cart.

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More of this kind of math is in The Pitch Deck Book.

Composite characters, invented companies. The mistakes are real; the people aren't.