Equity Financing

To start a business, you need money (you know, the old expression: "you need to spend money to make money.") That's called financing...basically, how you get the money to do what you want to do.

There are two ways to raise money from other people (besides begging): debt and equity.

Debt is borrowing money. That's going to the bank (or your grandma) and taking out a loan for $10,000 to get your comic book store off the ground. That's debt financing.

With equity, you sell a part of the business. So your grandma still gives you the $10,000. But instead of paying her back in monthly installments (or in trade by playing canasta with her), she becomes your partner. She gets 10% (or whatever portion you guys negotiate) of the business.

Then you have to listen to her two cents about where you put the Spider-Man rack. On the upside, though, you don't actually have to pay her back. If the comic book store goes belly up, she's just out the $10,000. She makes money if the business is successful and becomes a valuable asset. Then she owns 10% of a thriving business. That's equity financing.