Two contracts, two philosophies
The partner buys a fraction of the future: shares in profits and losses, votes, and cannot demand their money back — their exit is to sell their stake. The creditor buys a flow: interest and principal on agreed dates, with collateral if prudent, and no say in how you run things (except for covenants). Everything else — control, cost, taxation, risk — follows from that difference.
The real cost of each currency
- Equity: there is no monthly payment, but it is the most expensive currency if the business succeeds: the 30% you sold for $2M may be worth $20M in a few years. It also dilutes control: board seats, veto rights, minority rights.
- Debt: its cost is visible (the rate) and deductible — interest is a tax-deductible expense for the business, subject to the requirements and limits of the LISR (Mexico's Income Tax Law). It dilutes nothing… as long as you can pay: debt turns a bad quarter into a crisis, and the collateral is on the line.
Financial rule of thumb: debt amplifies good projects and buries bad ones. If the business's expected return comfortably exceeds the loan rate, leverage multiplies your return as a shareholder; if it does not, you are working for your creditor.
When each makes sense
- Private debt shines when there is proven cash flow or assets to back it: working capital, buying machinery, seasonal inventory, a signed contract waiting to be collected. Short to medium term, visible returns.
- Equity is the currency of genuine risk: early-stage companies with no cash flow, long-horizon growth bets, projects where a fixed payment schedule would be a noose.
- Hybrids (convertible debt, notes with warrants) bridge uncertain valuations: the money comes in as debt and converts into equity if the business takes off.
The third way that does not exist (legally)
The classic temptation of those who want neither to dilute nor to qualify for a loan: "I raise money from acquaintances and promise them a fixed return." That — an offer to unspecified third parties with a promise of repayment — is captación irregular (irregular deposit-taking): prohibited by art. 103 of the LIC and punishable by prison (art. 111). The legal versions of that idea are precisely defined: true partners (they assume risk, with no guaranteed repayment), loans negotiated one by one and documented, or the securities-market route with registered securities. We explain it in depth in irregular deposit-taking.
Checklist before deciding
- Does the project have cash flow or assets today? → debt is viable. Only future promise? → equity.
- Does the expected return comfortably exceed the available rate? If not, don't take on leverage.
- Can you survive 6 bad months while still making the monthly payment? Stress-test it with the simulator.
- What is worth more in 5 years: the % you would sell or the interest you would pay?
- Whichever route you take: paperwork in order — a shareholders' agreement for equity, a secured mutuo (loan agreement) for debt.