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Equity vs Debt - Fundraising for Startup & Business | #3 MASTER INVESTOR - YouTube
Channel: Asset Yogi
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Namaskar my name is Mukul and welcome to Asset Yogi.
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Where we unlock the knowledge of Finance.
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In this video, I am going to talk about a very important concept.
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Which is related to fundraising and investment.
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Whenever you buy an Asset.
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you want to buy a car or you want to buy a house
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For that you need funds
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Similarly, if you want to invest in a project or in a business.
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Even in that you will require funds
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Broadly, If we see any fundraising or investment is divided into two parts.
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One is equity and the other is Dept.
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Now let's talk about fundraising here If you want to invest anywhere
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Still you have two options
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One is an equity investment
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Now as you raise the fund
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You can also invest in a Project or a Business
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If you want to raise funds for business For example,
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Or if you want to raise funds for someone else's
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business, then you can give money to him.
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money can also be given in the form of equity and
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money can also be given in the form of debt.
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So in this video, we will understand this whole concept a little better.
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That's how equity and debt work
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At the same time, we will also look at some specific things
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Suppose if you start a business,
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then how can you apply equity valuation in it,
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how can you raise debt funds?
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How to raise equity funds?
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So you must watch this video from Beginning to End.
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So that you can understand this concept very well
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let's go straight to the blackboard.
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So let us understand equity and dept from an example
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If I had to define in general
As for equity,
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I would say that it is ownership.
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If you invest in an asset or invest in a business.
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So the amount of your portion that is owned within it, we call it equity.
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If we look at its technical definition, equity = assets - liability.
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Don't get too confused
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I will explain this to you with an example.
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Suppose you buy a Car.
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You may not make the full payment by yourself.
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maybe you take a loan over it So this car is worth Rs.10 lakhs,
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maybe you took a loan of seven lakhs on it.
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People generally buy cars like this.
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You make a down payment of Rs. 3 Lakhs you put this money out of your pocket
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So under this, you have taken a loan of seven lakhs. We call it Debt.
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Because you have to pay back the amount with interest
to the bank
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or from whichever financial institution you have taken your loan from
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The down payment money, we call it ownership, has become your equity.
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You will have 30% equity in this vehicle
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Here I write 30%
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Because you have given three lakh rupees
out of Ten Lakhs rupees
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So as you go on paying off the loan, your equity will increase.
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After 1 year, suppose you have a loan of six lakhs.
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So the equity you have in that case will become worth four lakhs.
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Meaning that the equity or ownership you have,
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at that time will be around 40% equity. in that Car.
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So here I also write that after 1 year
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your 40 percent ownership has become your 40 percent of equity.
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Similarly when we buy a house,
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We follow the same concept
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Now see here the amount of 1000000 I had taken has become our asset.
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So we had said that equity = asset-liability,
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so if we keep this equation as well,
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then the equity you get is 300000 = 1000000 - 700000
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so according to this equation, you have three lakh as your equity
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Now let's move on to the property example
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Suppose you bought your house whose price is ₹ 50 Lakhs
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So the price of the asset became ₹ 50,00,000
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Now you finance it, possibly you take a loan of 40 lakhs on it.
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Rs. 40,00,000 lakhs means that 80 % is your debt.
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The total price of the house is Rs. 50,00,000 Lakhs.
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You made your down payment of the rest Rs. 10 lakhs.
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So this is your equity portion, which has become 20% in this case
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So the ownership, you have when bought this house in the start, is 20%
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Your equity portion will increase as you repay the loan.
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let's say, if you have taken a loan of 20 years.
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After 20 years it is possible to pay off the entire loan.
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So at that time, you will have 100% equity.
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This means you will have 100 % of ownership.
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Similarly, you can apply this concept for any business for any asset.
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Now let's take an example of business,
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suppose you want to start a restaurant.
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So there are different assets in the restaurants.
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You can take any business example, not only restaurants.
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So in which type of assets do you have to invest?
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First of all, you have an idea of what type of restaurant you will run.
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what types of machinery you will need?
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What human resources will it take?
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Human resources mean Chefs and waiters etc.
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Then how much capital will be required,
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how much cash amount will you take?
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what software will it need?
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If you have any IPR, trademarks, or copyrights, or if you use a website, how much will it cost?
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So these are all your assets.
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Now how much will your total cost be? that you can calculate.
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let's say you estimate that it will take you a total of 1 crore rupees to start a restaurant.
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Now maybe you have three partners and
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Suppose each partner can arrange 20-20 lakhs each.
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If you arrange 20-20 lakhs by yourselves,
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So even if you have arranged 60 lakhs.
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So the rest of the 40 Lakhs you still have to raise.
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So it may be that you can take a loan of 40 Lakhs,
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you can approach any bank, then you can get a loan of 40 Lakhs.
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So when you start this company, whenever will start this restaurant
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So basically your equity is worth 60 lakhs.
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And the rest of the loan that you took for 40 lakhs has become your debt.
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So we will say that you have 40 percent dept and 60 percent equity.
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So the value of your total assets becomes your one crore rupees.
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Now let's go ahead,
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maybe this business of yours will grow and in the future, you may have 5-6 restaurants.
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Now you will think that we need more money
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Now we have to invest because we want to grow it fast.
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We want to run 40 restaurants instead of 4 restaurants.
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So you estimate that let's say you have a requirement of Rs. 2 Crores.
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you want to raise an investment of Rs. 2 crore
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So if you want to raise investments worth Rs. 2 crore.
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So you have to calculate the valuation of this company
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You can't say that 1 crore into 4 then 4 crores is the valuation.
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It doesn't work like this
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Now basically the valuation you will take will be on the future potential,
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How is this valuation done?
I will make a video about that sometime in the future.
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let's assume that we put a valuation of 10 crores on this company.
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Now at a valuation of 10 crores,
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So now we need an investment of two crores,
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Now we will take equity investment of Rs. 1 crore.
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Now let us see how the equity of one crore will be raised.
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and second, we will get a dept raise of Rs. 1 crore
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We will take one crore rupees from the bank.
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So now that valuation of this company is Rs. 10 Crores.
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So, you will get the dept of one crore easily from the bank.
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You will not have to do any share delusion in it.
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But when you raise equity investments then you have to dilute shares.
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So let's assume that your 100 % valuation of 100 % shares is 10 crores.
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Now you want to fundraise Rs. 1 crore here, If Rs. 1 crore equity,
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then basically you have to dilute 10 percent of one crore equity.
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10 percent you'll raise from investors.
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Now you will think that if you want to do 10 percent delusion.
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So you will find 10 investors
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you will find 10 Investors.
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Which will take your 1 percent equity each.
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Into 1% equity each.
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Total 10% equity will go to them.
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Now what will be the value of this 10% equity
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obviously, it will cost Rs. 1 crore
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So this is 10 investors,
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how much money they will invest, they will invest Rs.10 lakhs each.
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10 X 10 your investment of Rs. 1 crore will be raised.
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So there will be an equity raise of Rs. 1 crore.
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Equity of 10 percent i.e. Rs. 1 crore is raised.
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Then what will happen in this case 10 investors have got 10% of your equity.
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So how much is left with the promoters, 90% is left with the promoters
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Now there were three partners so that means 30 percent of each.
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Then what will happen in this case that what happens in equity investment?
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that your shares get delusional, But you don't have to return this money.
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So here you have raised an investment of one crore with equity of one crore
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You do not have to return this money immediately.
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But as you grow your company, when the value of your share will increase.
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So those who are investors can earn their money by selling those shares.
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You don't need to pay investors.
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But when you will raise this debt of one crore
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Whatever interest you will have in it,
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You will have to pay off that to the bank.
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So this is the difference between debt and equity.
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So like I said equity money you don't have to return directly to investors
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but whatever the debt's money is,
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Whoever is the lender or the bank, with the interest you have to return the money.
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Then whenever you talk about the balance sheet, will use the same equation
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Assets = equity + liability
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Earlier we saw assets = equity - liability
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So in the balance sheet, you put the same equation
assets = equity + liabilities
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So here is your basic concept of equity and debt.
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Now here we will see some differences between equity and debt.
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investments or fundraising.
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I will take the same example.
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Your restaurant has made its chain.
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let's say you have opened four restaurants.
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You put a valuation of Rs. 10 crores and the fund you raised.
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1 crore you raised from equity.
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And the remaining one crore has been raised from your dept.
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let's say you have a business loan which is 12 % p.a.
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So you have to pay this interest rate every month or quarterly or yearly.
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Now the shareholding pattern will be
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basically like we talked about earlier that 90% of the promoters have it,
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here basically there were 3 promoters then they got 30% each.
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You dilute the remaining 10%, that is, it went to the investors,
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now this 10% of the money you raised
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There are two main ways
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You can raise money either publicly or privately.
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Private means you can raise money from your family, friends, private equity, etc.
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Public means that you can raise money from the Share market.
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So let us see the difference between equity and debt.
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So as we talked about ownership before
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Equity investors who are your part-owners within the company.
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So now what we are talking about this 10%, if they have given you 1 crore rupees,
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then that 10% which is their shareholding, will go to the investors.
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As you grow the company, suppose in the future it gets a valuation
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of 100 crores instead of 10 crores,
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then similarly the investors' money will become 10 crores of 1 crore.
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And this valuation of your company will also become
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90 crores 0f 9 crores in the same proportion.
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Basically, those people are participating in your growth story.
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They will get returns as the company grows.
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But what happens in the dept. Your ownership is not diluted.
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This is the money you raised.
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The debt of one crore will return to the lenders as per the interest amount at 12 %.
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And no ownership will be given to the lenders in the company.
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So here only Equity investors will get ownership.
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The banks or lenders won't get any ownership in the company.
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Then if we now talk about Returns.
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So the returns of equity depend on the growth of the company.
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as we will talk about here, it is today's valuation of 10 crore rupees.
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it may be a 100 crores valuation within 3 years.
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You got this one crore rupee as equity from investors
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and you got this one crore debt raise.
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This is 2 crore rupees,
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your growth may be very fast.
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And your valuation might become 10 times within 3 years.
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So there is no limit to returns, return can be in 0% to unlimited
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It could be 10 percent or it could be a hundred percent or even thousands of percent
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Depending on what kind of industry it is or what kind of business.
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Now let's talk about debt.
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The returns inside the debt are directly fixed percentages of interest.
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So like in this case the bank is getting returns of 12 percent.
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So if the bank has given you one crore rupees.
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So that bank will earn Rs 12 lakhs p.a.
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the bank will get the same returns.
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But at the same time, its risk is also less.
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Now let's talk about risk.
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Risk is very high in equity,
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hence, the expectation of returns is also high.
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I have told this in many of my videos.
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that the higher the risk, the higher the expectation of returns.
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Any Equity Investor
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will give you money only when you give a return of 25, 30, or 40 percent.
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But they also know that there is a risk here, yet they are ready to take the risk.
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So the inverter knows that they can lose a hundred percent of their money.
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If the company gets bankrupt then they will lose their hundred percent of the money.
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But if we talk about debt.
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So the risk in it is less .
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because now this is the interest portion, every year the company has to be returned .
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and secondly, if the company is bankrupt by any chance
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So those who are the lenders have the first right on assets.
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when they auction the assets,
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then they will keep the money first.
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Equity investors get the money that is left
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ok, so take care of this a little bit
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A lot of people get a little confused about this
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So the portion with debt and whatever the loan portion is
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Banks always have the first right on it, Whenever assets are auctioned
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Then if we now talk about investors and lenders,
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what kind of investors and lenders are there in Equity and Debt?
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So in equity, you can also raise money from the public.
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Like I talked about the stock market many companies raise money from the stock market.
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Now in our example, we are raising Rs. 1 crore only
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So the stock market may not make sense.
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So in this, you can do private equity or venture capital or angel funding,
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or maybe even self-funding, you can raise your money yourself
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maybe you can raise one crore by yourself too.
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so there is no problem with that.
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So both public and private equity options are there.
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now if we talk about debt.
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Generally, banks and financial institutions give maximum debt.
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So you can fundraise with banks and financial institutions
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If you have the requirement of debt then it is a very good idea.
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Otherwise, there are some individuals who also,
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there are high net worth individuals who lend personal loans.
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then the company also have debt products of them like corporate bonds,
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so they may give you returns of 12, 13, 14 percent.
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So you can invest in those companies also, and if you own a company.
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then you can also do dept funding by issuing bonds.
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Then bonds are some of the government too,
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the government also keeps on raising debt funds from time to time.
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If they want to invest in infrastructure,
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for example, they have NHI. REC is a rural electrification company's bond.
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So these are all debt products.
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Now if we talk about the product,
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if you want to invest in equity, then what are the options?
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So one way you can invest in Stocks.
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Nowadays we can call equity as stocks as well.
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Equity also means Stocks, Equity and stock have become synonyms.
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Similarly, if you invest in Mutual funds
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also, many Mutual funds are equity mutual funds
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Generally, mutual funds invest money in the stock market.
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You can invest in Mutual funds, if you want to invest in equity.
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ULIPs are basically Unit Linked Insurance Plans,
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these are also 1 type of insurance product that invest your money in the stock market.
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Similarly, your ELSS funds are called Equity Linked Savings Schemes.
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it is basically your tax-saving products.
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I will also make detailed videos about all these products.
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Then you have private equity, Like I told earlier
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let's say this company has to raise one crore rupees.
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So it can go to a private equity firm and from there it can raise money.
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So in private equity,it also includes venture capital and angel funding.
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which basically takes some percentage in your company,
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and they participate in your growth story.
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similarly, You can invest in startups.
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You can set up your own business.
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You can open your franchise.
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you can take any well established brand.
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you have fast-food chains, pizza companies, burger companies,
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then you have a beauty salon, their franchisees keep coming out,
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that too is your 1-way equity products.
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Treat franchises as your own business.
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And that too is a type of equity investment.
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Now if we talk about debt products.
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So you can give a loan to anyone.
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Definitively if you give a personal loan to someone,
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he will return you some interest.
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Maybe you give him a loan of 12,15,18 or 20 percent.
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So whatever is your 12, 15, or 18 percent will be your returns.
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Then there are debt products.
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Which Mutual Funds and ULIPs I was talking about In this,
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you also get debt products.
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Mutual funds invest in any bonds Or invest in debts of Govt.
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Then you have bonded like I gave you an example here as well,
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you can have corporate bonds and can also be government bonds.
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corporate bonds invest that money in business,
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and government bonds, they generally invest in infrastructure.
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So this is the basic difference between equity and debts.
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I hope this concept is clear to you after watching this video.
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I hope you liked this video So please like and share the video.
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If you have any suggestions or .want to suggest any topic for future videos.
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and if you will like to share any of your thoughts with the community
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then feel free to comment below.
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I keep sharing everyday finance and investment-related
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interesting topics here on this channel.
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So see you in the next video.
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Till then keep learning, keep earning and be happy as always
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