Raising capital means bringing money into a business from outside sources — investors, lenders, or the public — to pay for things the company’s own revenue cannot cover, like expansion, hiring, product development, or day-to-day operations. Companies do this in two main ways: by selling a piece of ownership (equity) or by borrowing money that must be paid back with interest (debt). Hybrid instruments and public crowdfunding options have widened the menu, but almost every raise still traces back to one of those two ideas.
The Two Main Paths: Equity and Debt
Equity financing means selling a percentage of ownership in your company in exchange for cash. The buyer receives shares or membership interests that represent a claim on the company’s future earnings and assets. Because investors only profit if the company grows in value, there are no monthly repayments. The trade-off is that you give up a slice of control and a slice of future profits.
Debt financing works the opposite way. You borrow money and commit to repay it, with interest, on a set schedule. Term loans from banks, corporate bonds sold to institutional buyers, and revolving lines of credit all fall in this category. You keep full ownership, but you take on a legal obligation to pay regardless of how the business performs. Lenders typically require you to pledge business assets as collateral, and if you default, they can seize the pledged property.
Debt agreements also usually include covenants — rules that limit what you can do with the business while the loan is outstanding. Financial covenants require you to maintain ratios like a minimum debt-service coverage ratio. Operational covenants may restrict dividends, additional borrowing, asset sales, or acquisitions without lender consent. Breaking a covenant can trigger a default even if every payment has been made on time.
A business with predictable cash flow often leans toward debt, because steady revenue can absorb fixed payments. A company with uncertain revenue often leans toward equity, because missed loan payments can push the business into distress.
Instruments That Sit Between: Convertible Notes and SAFEs
Early-stage companies often use instruments that blur the equity-versus-debt line. The two most common are convertible notes and SAFEs (Simple Agreements for Future Equity).1U.S. Securities and Exchange Commission. Common Startup Securities
A convertible note is a loan that automatically converts into equity — usually preferred stock — when the company closes its next funding round. Because valuing an early-stage company is difficult, the note defers the valuation question. Early investors get compensated for their risk through a valuation cap (a ceiling on the company valuation used to convert the note) and a discount rate (a reduction off the price-per-share paid by later investors). When a note has both, it typically converts at whichever gives the investor the lower price.
A SAFE looks similar but is not a loan. It carries no interest rate, no maturity date, and no repayment obligation. Instead, the company promises the investor a future ownership stake if a triggering event happens, such as a priced equity round or an acquisition. Until that event, the investor owns nothing. SAFEs are simpler and cheaper to execute, which is why they dominate seed-stage fundraising.
Raising From the Public: Crowdfunding and Regulation A+
Most private raises are limited to a narrow pool of wealthy investors. Two federal frameworks open the door to a broader audience.
Regulation Crowdfunding lets a company raise up to $5 million in a 12-month period through an SEC-registered online portal.2Investor.gov. Regulation Crowdfunding Both accredited and non-accredited investors can participate, subject to individual investment limits tied to income and net worth. The financial disclosure requirements scale with the size of the raise:
- $124,000 or less: income and tax figures certified by the company’s principal executive officer.
- $124,001 to $618,000: financial statements reviewed by an independent public accountant.
- Over $618,000: audited financial statements from an independent public accountant. First-time issuers raising up to $1,235,000 may provide reviewed rather than audited statements.3eCFR. Part 227 Regulation Crowdfunding, General Rules and Regulations
Regulation A+ is a scaled-down public offering. Tier 1 allows offerings up to $20 million in a 12-month period; Tier 2 allows up to $75 million.4U.S. Securities and Exchange Commission. Regulation A Tier 2 requires audited financials and ongoing reporting but preempts state-level “blue sky” registration, so you do not register separately in every state. Tier 1 skips ongoing reporting but must comply with state blue sky laws wherever securities are sold.
How Each Choice Affects Taxes
Capital structure moves the tax bill. Interest paid on business debt is generally deductible, which reduces the after-tax cost of borrowing. For tax years beginning in 2026, the deduction for business interest expense is capped at the sum of your business interest income plus 30% of your adjusted taxable income for the year.5Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Disallowed interest can generally be carried forward.
Equity offers no comparable deduction. Costs of issuing stock — legal fees, accounting fees, underwriting fees, and regulatory filing costs — cannot be deducted or amortized. They must be capitalized by reducing the net proceeds from the stock issuance.6Internal Revenue Service. Treatment of Costs Facilitative of an Initial Public Offering A corporation recognizes neither gain nor loss when it issues its own stock, so the issuance itself is not a taxable event.
The Legal Rules Behind Any Raise
Federal law treats every sale of a stake in your company as a securities sale. That means you must either register the offering with the SEC — which is expensive and slow — or fit within a specific exemption. Most private companies use Regulation D.
Two exemptions do most of the work. Rule 506(b) lets you raise an unlimited dollar amount but forbids public advertising and caps sales at 35 non-accredited purchasers in any 90-day window. Rule 506(c) permits public advertising, but every investor must be accredited, and you must take reasonable steps to verify each investor’s status rather than accepting self-certification.7eCFR. 17 CFR Part 230 – Regulation D Rules Governing the Limited Offer and Sale of Securities
Who Counts as an Accredited Investor
An individual qualifies if they earned at least $200,000 in each of the two most recent years ($300,000 combined with a spouse) and reasonably expect the same in the current year. Alternatively, an individual qualifies with a net worth exceeding $1 million, excluding the value of their primary residence.8U.S. Securities and Exchange Commission. Accredited Investor Net Worth Standard Banks, insurance companies, and investment funds also qualify. Selling to anyone outside these categories brings extra disclosure requirements and the investor-count limit.
Form D and Bad Actor Screening
If you sell under a Regulation D exemption, you must file a Form D notice with the SEC no later than 15 calendar days after the first sale.9eCFR. 17 CFR 230.503 – Filing of Notice of Sales Form D is a brief notice, not a registration statement. Many states also require a separate notice filing and fee.
A company cannot use Rule 506 if it, its directors, officers, significant shareholders, or certain other “covered persons” have disqualifying legal histories. Disqualifying events include felony or misdemeanor convictions tied to securities fraud or false regulatory filings, court injunctions barring someone from securities-related conduct, and certain SEC or state regulatory orders barring a person from the industry.10Federal Register. Disqualification of Felons and Other Bad Actors From Rule 506 Offerings Run background checks on every covered person before launching the offering.
Anti-Fraud Rules Apply to Every Deal
Whether the offering is registered or exempt, federal anti-fraud rules apply to every sale of securities. SEC Rule 10b-5 makes it unlawful to make an untrue statement of a material fact, to omit a material fact that would make your other statements misleading, or to engage in any scheme that operates as a fraud on investors.11eCFR. Manipulative and Deceptive Devices and Contrivances Violations can trigger SEC enforcement, criminal prosecution, and private lawsuits. Every document you hand to a potential investor or lender needs to be accurate, and material risks belong in the disclosure rather than hidden from it.
What You Need to Show Investors
Whichever path you choose, the people writing checks want a documentation package. It typically includes:
- Financial statements: balance sheets, income statements, and cash flow statements.
- Business plan covering your market, growth strategy, and revenue projections.
- Capitalization table listing every equity holder, the number and type of shares they own, and the price they paid.
- Organizational documents: articles of incorporation or organization, operating agreements or bylaws, and any existing shareholder agreements.
- Use of proceeds describing how you plan to spend the money. If more than one use is possible, describe each probable use and the factors you will consider when allocating funds.12eCFR. 17 CFR 227.201 – Disclosure Requirements
How a Raise Closes
The closing is the final step. Everyone signs the binding agreements and money moves. For equity deals, that means stock purchase agreements or subscription agreements, followed by the company issuing stock certificates or updating its electronic ownership ledger to show the new holders. For debt, the company and lender sign promissory notes and loan agreements, and the company receives a finalized repayment schedule.
Funds usually move by wire transfer on the closing date. After they arrive, the company delivers any post-closing items — updated capitalization tables, legal opinions from counsel, and compliance certificates confirming that every condition has been met. Once those exchanges are done, the raise is complete and the money can be spent according to the use-of-proceeds plan.