Question

You are the CFO of Rock Inc, a young start-up. The company has not generated positive cash flows for the past three years and you estimate that it will take at least another 2 years for the company to become cash flow positive. To fund the next phase of growth, what should be a better source of capital, debt or equity? Why?

Answer 1

Answer:

Equity

Explanation:

The choice should be very straight forward, the company doesn't generate enough cash, and if it takes debt, it will not be able to pay it back. The only choice for raising capital is through issuing equity.

This is something normal for many startups, e.g. FB, Amazon, Google, etc., all got financed through equity for several years before being able to issue debt.  Of course debt is cheaper than equity, but it also poses a risk for the company.