When raising equity eats your optionality

By Nicolas Gallo

The most expensive way to buy time

At Lendity we keep seeing a pattern that many founders would rather not name out loud: using equity as a way to purchase time.

When pressure rises, it is common to reach for a round (often via convertible notes) to extend runway and preserve momentum. It always looks like the right move, but it is also frequently the most expensive way to buy a few more months.

Equity does not simply keep paying salaries and bills. It trades away ownership and control, and it gives up a slice of the upside you are struggling to create. Many founding teams treat a round like a fixed price for survival, but the real price is paid later: at an exit, that same percentage can translate into a very large transfer of value that was easy to underestimate when signing the term sheet (and we are not even considering liquidation preference implications).

Equity is a powerful tool when it funds clear value creation: reducing milestone risk, scaling a growth engine that already works, or building a strategic advantage. The issue is when equity becomes an anesthetic: capital raised to avoid hard decisions, delay focus, or keep a plan alive that is not working. If you fund what is broken instead of fixing it, the underlying issue rarely improves. It quietly compounds while the company grows in headcount, complexity, and commitments.

Internally, the reset becomes harder because the organization expands around the wrong priorities. Externally, fundraising becomes harder because investors learn that more capital did not produce stronger fundamentals. Equity can lengthen runway, but it cannot repair fundamentals. If they are broken, extra time usually increases the cost of the lesson.

A useful analogy is how countries access financing: a country with a predictable, contained fiscal deficit can usually borrow on reasonable terms because markets can underwrite the path. A country with a deficit that keeps widening for avoidable reasons may still borrow for a while, but terms deteriorate and access becomes fragile because credibility weakens. When that second country implements structural reforms (usually painful but necessary ones), financing options improve materially. Startups work the same way. You can often buy time, but if that time is used to avoid structural fixes, credibility erodes. If the time is used to make the hard changes that restore sustainability, the company becomes more investable and capital becomes cheaper and easier to raise.

The mirage of "rented" growth

There is another situation we often see in tech startups and scaleups. It is less obvious than the one described previously, and that is precisely why it can be more damaging: the company appears to be performing because revenue is growing quickly, yet the growth is driven primarily by ever increasing sales and marketing spend.

In line with what Rafa explains in The Hidden Economics of Growth, spend-driven growth can look like momentum while it quietly increases fragility in the fundamentals.

From the outside, this can look like a functioning growth engine. The top line moves, the pipeline looks busy, and the story is easy to tell. The underlying risk is that the revenue base is not becoming more solid. If the pace of growth, the margins, and the retention profile are not sufficient to recover customer acquisition costs within a reasonable timeframe, or if new customer wins are largely offset by churn and downgrades, this means that the business is not creating value and compounding it, it is merely converting cash into short-lived revenue.

A simple way to think about it is the bathtub problem. As long as you keep pouring water in, the level stays high, but it will drop as soon as you stop. In companies where revenue is effectively sustained by continuous spending, the moment capital becomes more scarce the decay becomes visible, not only in growth rates but sometimes in absolute revenue. The natural reaction is to raise again and spend again to protect momentum, but if the system is leaking, additional fuel won’t create durability. It merely accelerates burn while postponing the work that actually makes the business investable.

This is where it helps to distinguish between two types of revenue. Some revenue is built, it rests on a foundation that remains when you reduce spend. Customers stay, expand, and deliver improving efficiency over time, which means growth becomes less dependent on constant incremental CAC and the company can slow spend without falling off a cliff. Other revenue is effectively rented, since it exists primarily because spending continues. In those cases growth requires ever higher CAC, churn and downgrades offset new bookings, sales efficiency does not improve, and pausing spend triggers a fast decay first in bookings and then in revenue.

The main problem here is that many founding teams do not realize they are renting revenue until the market forces them to slow down. As long as capital is available, the bathtub keeps filling. But when capital tightens, investors ask different questions, not only how fast can you grow, but how durable is what you have built.

Hard decisions preserve optionality

Whether you raise equity, either to buy time or to rent growth, the end result can be surprisingly similar: dilution compounds before the business gets stronger. Over a few rounds, ownership shrinks, expectations rise, and the company needs to keep running just to justify the path it is already on.

The consequence is not only “less upside”: it is less room to maneuver. With lower founder ownership, resets become harder to execute and harder to finance. When the moment arrives to simplify, refocus, or take a painful decision, the company is often trying to do it with a heavier organization, a tighter cap table, and fewer strategic options.

This is the real risk both patterns share: using equity in ways that postpone fundamental changes can remove the very flexibility you need to fix them. Equity is a powerful tool that should be used to move the company forward, not to keep it still. It is capital meant to fund concrete actions that make the business stronger: a clearer strategy, a more repeatable go to market motion, better unit economics, healthier retention, and a product that truly earns its growth.

When the choice is between taking a painful decision and raising equity to avoid it, the right move is always the painful decision: cutting what is not working, resetting priorities, simplifying the organization, focusing on what can actually scale. Hard decisions do not just save runway, they fix fundamentals, and fundamentals are what investors ultimately pay for.

Build smarter. Scale faster. Give up less.
Join 400+ founders getting our monthly insights on capital and growth.

Learn more about Industry Insights

Cost of Capital: A Guide for Startup Founders

Tag: Funding Strategies