This article is from guest contributor Luka Flannigan, Investment Manager at Mighty Partners .
Most founders think about capital in binary terms; either raise a round or don’t. But the companies that build most efficiently are the ones that treat equity and debt not as alternatives, but as tools with different jobs. The real skill is knowing which tool to reach for, and when.
There’s a quiet shift happening in how Australian growth-stage companies think about financing. For much of the last decade, equity was the default answer to every capital question. But as interest rates have normalised, venture markets have tightened, and non-dilutive funding options have matured, more founders are asking a more sophisticated question: does this capital need to come from equity at all?
This isn’t about preferring one instrument over another. It’s about understanding what each type of capital is actually optimised for, and sequencing them accordingly.
The fundamental difference
Equity capital is patient, flexible, and loss-tolerant. It’s designed to fund uncertainty. When a company is pre-revenue, pre-product-market-fit, or navigating genuinely unpredictable territory, equity is usually the appropriate instrument because investors in equity are compensated through upside, not interest payments, and they understand that capital deployed at early stages is high-risk capital.
Debt capital, by contrast, is designed for environments where cash flows are predictable or assets are tangible. It requires repayment on a schedule, which means it only fits situations where the business can reasonably service that obligation without disrupting operations. In exchange for that constraint, founders retain full ownership; debt doesn’t dilute.
The mistake most founders make isn’t choosing one over the other; it’s failing to match the instrument to the use of funds.
A framework for thinking about stage
Broadly speaking, the equity-to-debt ratio of a company’s capital stack should shift over time as business model risk declines and revenue visibility improves. Here’s a rough way to think about it by stage:
Stage | Orientation | What this means in practice |
Pre-seed / Seed | Equity-first | Product risk is high, revenue is absent or minimal. Equity is almost always the right instrument here. |
Series A | Equity-led, debt emerging | Proven product-market fit and strong traction, with steady and growing revenues. The business model is demonstrably repeatable, which begins to unlock non-dilutive options alongside the core equity raise. At this stage some founders start layering in debt, as it becomes available as an option. The key prerequisite is revenue visibility sufficient to support debt servicing, even modestly. |
Series B+ | Blended capital stack | By Series B, the business typically has meaningful revenue scale, a clearer path to profitability, and enough operating history for lenders to underwrite with confidence. This is where a genuinely blended capital stack becomes both accessible and strategically sensible. Equity remains the primary instrument for funding growth, new markets, headcount, product expansion, but debt can increasingly handle discrete, well-defined capital needs. Working capital facilities, venture debt to bridge between rounds, and R&D finance against a known Tax Incentive receivable are all common at this stage. The logic is straightforward: if a specific use of funds has a predictable return profile, there's little reason to fund it with equity and absorb the dilution cost. |
Growth / Pre-IPO | Sophisticated structuring | At growth stage, the company has a proven, scalable business model with substantial revenues and, in many cases, a visible path to an exit or liquidity event. The capital stack reflects that maturity; equity and debt are no longer in tension, they're deployed in parallel across multiple instruments optimised for different purposes. Debt capacity expands significantly at this stage. Revolving credit facilities can fund working capital efficiently. Asset-backed lending becomes available where the balance sheet supports it. Larger venture debt tranches can bridge to IPO or provide pre-exit liquidity without triggering a dilutive down round. At this stage, capital structure decisions have direct implications for IPO readiness, acquirer due diligence, and how proceeds are distributed at exit. Covenant structures, intercreditor arrangements, and the interaction between debt facilities and shareholder agreements all require careful navigation, typically with specialist legal and financial advisory support. |
This progression isn't a hard rule. A Series A company with strong ARR and low churn may be better placed to service debt than a Series B company burning hard into an unproven market. Stage is a useful proxy for risk profile, but the more reliable test is always the specific business: its revenue visibility, cash flow predictability, and how cleanly a given use of funds maps to repayment. Treat the framework as a starting point for the conversation, not a prescription.
The use-of-funds test
The cleanest way to think about it is the relationship between the use of funds and the repayment source. If the activity being funded generates a measurable, near-term return, or sits alongside a core business that can comfortably service the payments, debt is worth exploring. If the payoff is genuinely uncertain, long-dated, or contingent on other milestones, equity is usually the better fit.
In practice this means hiring your first sales team into an unproven market, entering a new product category, or backing a founding team into genuinely uncertain territory; these are equity calls. The payoff is real but unpredictable, and equity is designed to absorb that risk.
On the debt side, funding a new market expansion off the back of a business already generating strong cash flows, or scaling a marketing channel with a demonstrated and measurable ROI, can both support a debt structure. The core business provides the repayment confidence that lenders need.
R&D sits in its own category. Where spend is eligible for the Tax Incentive , there's a known future receivable attached, which makes R&D finance a natural fit, freeing up cash flow or reinvesting directly back into the R&D pipeline.
The cleaner the cashflow link between the activity and the repayment, the more appropriate debt becomes.
Dilution is a real cost
Founders sometimes treat dilution as an abstraction; a percentage that only matters at exit. But dilution compounds across rounds. A founder who raises $2M at 20% dilution, then $8M at 25%, then $20M at 20%, might own less than 40% of their business before a Series B closes. For founders who plan to run their companies for a long time, or who believe deeply in the terminal value they’re building, that compounding matters.
Non-dilutive capital, whether debt, grants, or tax incentive financing, preserves the equity table. Used judiciously, it means that when dilution does occur through equity rounds, it’s happening at a higher valuation, on better terms, with more founder leverage at the table.
Where founders get this wrong
The most common mistake I observe is raising equity for activities that could have been funded with debt, thereby diluting the cap table unnecessarily. This often happens because equity is the path founders know, they know how to run a raise, who to pitch, and what the process looks like. Structured debt products, particularly newer instruments like venture debt, R&D finance, or revenue-based financing, require a different kind of diligence and aren’t always in founders’ line of sight.
The second mistake is the reverse: reaching for debt too early, before the business can comfortably service it. Debt at the wrong stage doesn’t just create financial risk; it creates operational distraction. Management attention spent managing covenant compliance and lender relationships is attention not spent on customers and product.
The third, and perhaps most subtle, mistake is treating every capital decision independently. Founders who think carefully about capital structure consider how each instrument fits into the broader stack; how a debt facility today affects optionality for the next equity round, how a convertible note interacts with existing investors, how a particular covenant structure might constrain future financing.
Key Questions to Ask Before Choosing an Instrument:
- Does this use of funds generate cash flows that can service repayment on a defined timeline?
- What is the dilution cost of using equity here, and what would that equity be worth at exit?
- Are there non-dilutive structures – debt, grants, or tax incentive financing that fit this specific need?
- How does this instrument interact with my existing capital structure and future raise plans?
- Can the business comfortably service this obligation without compromising operating performance?
A final thought
There’s no universally right answer to the equity-versus-debt question. What I’d encourage founders to develop is the habit of asking the question deliberately, at every capital decision point, rather than defaulting to the instrument they’re most familiar with.
Founders benefit from building relationships with advisors who can take an instrument-agnostic view; people who can look at a specific capital need and evaluate the full range of structures before making a recommendation. That kind of advice becomes increasingly valuable as the capital stack gets more complex.
The best-capitalised companies aren’t the ones that raised the most equity, or the least, they’re the ones that matched each capital need to the instrument best suited to it, and compounded that discipline across every round.
Luka Flannigan is an Investment Manager at Mighty Partners , provider of flexible, non-dilutive capital to growth stage technology companies in Australia and New Zealand.
Disclaimer: Views expressed are the author’s own and are intended as general educational commentary only, not financial advice. Visit mightypartners.com.au for information on Mighty Partners venture debt and R&D financing products.
