Should I Give Away Equity or Take Out a Business Loan?

Have you ever wondered why some app businesses thrive whilst others run out of money before they even get started? After building apps for over nine years, I can tell you its rarely about the quality of the idea—it's almost always about how founders choose to fund their development. I've watched brilliant healthcare apps collapse because the founders gave away too much equity too early, and I've seen fintech startups struggle under loan repayments that started before they had a single paying user. The decision between equity financing and business loans isn't just a financial one; it fundamentally shapes what your app business can become.

When someone comes to me wanting to build a mobile app, one of the first conversations we have is about money. Not just how much the app will cost to build (though that's important), but where that money should come from. Should you give away a chunk of your business to an investor, or should you take out a loan and keep full ownership? Its a question that keeps founders stuck for months, and honestly, I get why—both options have serious consequences that'll affect your business for years to come.

The way you fund your app today determines what decisions you can make tomorrow, and most founders dont realise this until its too late.

What makes this decision particularly tricky for app businesses is that mobile apps have unique characteristics compared to traditional businesses. Your development costs are front-loaded (you need to build the thing before you can sell it), your revenue model might take time to prove itself, and user acquisition costs can eat through cash faster than you'd expect. I've worked with e-commerce app clients who spent £50,000 on development only to discover they needed another £30,000 for marketing just to get their first thousand users. These realities make the funding decision even more critical because getting it wrong doesn't just slow you down—it can kill your app before it ever gets a chance to succeed.

Understanding the Real Cost of Money

Here's what most founders get wrong about funding—they look at the price tag and think that's the whole story. But I've watched clients make decisions based purely on numbers, only to realise months later that the actual cost was completely different from what they'd calculated. When you take £50,000 from an investor for 20% equity, you're not just giving away a fifth of your company; you're giving away 20% of every penny that company will ever make. Forever. And if your app becomes the next big thing? That percentage suddenly represents millions. I've seen it happen with a fintech client whose app took off after two years—their early investor's 15% stake went from being worth £30,000 to over £2 million. The founder still kicks himself about it.

Business loans work differently, right? You borrow £50,000, you pay back maybe £58,000 over three years with interest, and then its done. The bank doesn't own a piece of your success. But here's what the loan calculators dont show you—the pressure of monthly repayments when your app hasn't found its market yet, the personal guarantees most lenders want (yes, your house might be on the line), and the way fixed payments can strangle your cash flow just when you need flexibility most. I worked with an e-commerce app startup that took a £40,000 loan and spent the first 18 months just servicing debt instead of investing in user acquisition. They made it through, but barely.

The Hidden Costs Nobody Mentions

With equity, you're also getting a business partner whether you want one or not. That investor gets a say in decisions, access to your financials, and expectations about growth that might not match yours. I've seen investors push for aggressive monetisation that damaged user experience because they wanted quick returns. One healthcare app we built had an investor who kept pushing for ads—completely wrong for a medical application where user trust is everything.

Loans come with their own hidden costs too. Your credit score matters. A lot. Miss one payment and you're looking at penalty rates that can double your interest. Plus, most business loans for app development require collateral, and banks are notoriously skeptical about mobile apps since they cant repossess code if you default.

What This Actually Means for Your Cash Flow

Let me break this down with real numbers from projects I've worked on. An education app client took £75,000 equity investment at a £300,000 valuation (so 25% equity). Their app now generates £180,000 annual profit. That investor receives £45,000 every year. Forever. Over ten years, that's £450,000 from a £75,000 investment. The founder keeps £135,000 annually, which is decent, but they're essentially paying a 60% "interest rate" in perpetuity.

Compare that to another client who borrowed £75,000 at 8% over five years. Monthly repayments were £1,520. Painful? Absolutely, especially in months when revenue dipped. But after five years they'd paid £91,200 total, and then every penny was theirs. Their app makes about £150,000 annually now, and they keep it all. The loan cost them £16,200 in interest—equity would have cost them £37,500 per year ongoing.

But there's a massive caveat here—these calculations assume your app succeeds. If your app fails (and statistically, most do), equity investors lose their money completely whilst you still owe every penny of a loan plus interest. That's the trade-off nobody wants to talk about. I've had clients whose apps didn't work out; the ones with equity walked away cleanly, whilst the ones with loans faced years of debt repayment from their next venture or day job.

The timing matters too. Loan repayments start immediately, usually within 30 days. That means you're paying back money before your app has earned a single pound. Equity doesn't demand cash flow—investors wait for exits or profit distributions. For an app that needs 12-18 months to find product-market fit (which is typical), that breathing room can mean the difference between survival and shutdown. I watched an entertainment app struggle because £2,000 monthly loan payments forced them to rush their launch before they were ready. They never recovered from that rocky start.

When Equity Makes Sense for Your App Business

Look, I'm not going to sugarcoat this—giving away equity is a serious decision that I've seen go both ways for app founders. Some of my most successful clients wouldn't have made it past their first year without equity investment; others have regretted signing away 30% of their company for what ended up being less money than they could've borrowed. The question isn't really "should I give equity?" but rather "does my specific situation actually call for it?"

Equity financing makes the most sense when you're building something that needs serious capital before it can generate revenue. I worked with a health tech startup that needed £400k just to get through medical device regulations and build HIPAA-compliant infrastructure—there was no way they'd see revenue for at least 18 months. A bank wouldn't touch them because they had no assets to secure against, and honestly? Taking on debt repayments before you've got income is a recipe for disaster. They gave away 25% equity to an angel investor who understood the medical space, and that patience made all the difference.

Here's the thing though—equity isn't just about money. When I see founders doing it right, they're bringing on investors who add genuine value beyond their cheque. One of my e-commerce app clients took investment from someone with deep retail connections; within six months they'd secured partnerships that would've taken years otherwise. That's when equity actually works in your favour.

When Equity Is Your Best Option

• You need substantial funding before generating revenue (typically £100k+)
• Your app requires long development cycles or regulatory approval
• You're in a competitive market where speed matters more than ownership percentage
• The investor brings expertise, connections or credibility you genuinely need
• Your business model is unproven and banks see you as too risky
• You need flexible capital without the pressure of monthly repayments

But here's what most people don't realise—equity makes sense when your potential for growth is exponential rather than linear. If you're building a B2C app that could reach millions of users, giving away 20% of a potentially huge pie is smarter than keeping 100% of something small. I've seen fintech apps raise equity rounds specifically because their investors knew the unit economics would scale beautifully once they hit critical mass. One payment app I helped develop took £300k for 18% equity; three years later that stake was worth millions because the business grew faster than anyone predicted.

If you're considering equity, make sure your potential investor actually understands mobile apps. I've watched too many founders take money from people who treat apps like traditional businesses and then create friction at every product decision. An investor who gets the app economy is worth far more than one who just writes cheques.

The other scenario where equity shines? When you need to move fast in a crowded market. I worked with an education app that had three direct competitors all launching within months of each other. Taking six months to bootstrap would've meant arriving late to a market that was already being carved up. They raised £200k for 15% equity, launched ahead of schedule, and captured market share that their competitors never recovered. Sometimes being first with 85% beats being slow with 100%.

The Hidden Benefits Nobody Mentions

What's interesting is that equity investors often bring validation that money can't buy. When a respected angel or VC backs your app, it signals to potential partners, employees and future investors that someone credible believes in what you're building. I've seen this open doors that were previously shut—app store featuring opportunities, enterprise partnerships, even media coverage. Its a bit like having a reference letter from someone the industry respects.

The flip side? You're now accountable to someone else. Every major decision gets scrutinised, your timeline isn't entirely your own anymore, and if things go well you'll be sharing that success financially. I've watched founders struggle with this loss of autonomy, particularly technical founders who are used to making quick decisions without consultation. If you value complete control over your app's direction, equity might cost you more than just percentage points.

When a Business Loan Is the Better Choice

Here's what I've noticed working with app businesses over the years—loans make sense when you've already proven your concept and you're looking at predictable growth that you can measure. I mean, if you've got an app that's already generating revenue (even if its modest) and you can show clear numbers on user acquisition costs versus lifetime value, a loan starts to look really attractive compared to giving away ownership of your business.

I worked with a healthcare scheduling app that was pulling in about £15,000 monthly in subscription revenue; they needed £80,000 to build out a telehealth feature that their existing users were literally asking for. The founder could see exactly how many users would upgrade based on their survey data and usage patterns. Taking a business loan made perfect sense because the return was predictable—they didn't need to gamble on future success, they just needed capital to build something their customers already wanted to pay for. Within eight months they'd paid back the loan and kept 100% of their equity.

Loans work best when you need a specific amount for a specific purpose with a clear ROI. Building version 2.0 of your app? Adding a feature that existing users are requesting? Scaling your marketing once you know your numbers? These are loan-worthy scenarios. The key thing is you need to be able to service the debt from existing or very near-term revenue—banks aren't interested in your five-year vision, they want to know you can make payments next month. And honestly? That financial discipline is good for your business anyway because it forces you to focus on revenue-generating activities rather than pie-in-the-sky features that might not move the needle.

When Your Numbers Tell a Clear Story

If you can open your analytics and show consistent month-over-month growth, even if its small, you're in a much better position for a loan than equity. I've seen fintech apps with just 3,000 active users secure £50,000 loans because their retention rate was 68% and their churn was predictable. Banks love predictable. Investors love potential. Know which one you're selling.

The Hybrid Approach That Nobody Talks About

Most people think its an either-or decision—you either give away equity or you take on debt. But honestly? That's not how most successful app businesses I've worked with actually fund their growth. The hybrid approach is where things get interesting, and it's something I've seen work really well for clients in all sorts of situations.

Here's what this looks like in practice. You might take a small business loan to cover your initial development costs—say £50,000 to build your MVP and get it to market. This keeps you in full control during those critical early months when you're still figuring out product-market fit. Then, once you've got traction (real users, revenue data, engagement metrics), you bring in equity investors to fuel your growth. The difference? You're now negotiating from a position of strength, and you'll give away far less equity than if you'd gone to investors with just an idea and some wireframes.

I've seen founders reduce their equity dilution by 15-20% simply by proving their concept with debt first, then raising equity when they had the numbers to back up their valuation

Another hybrid model I've seen work well is revenue-based financing combined with a small equity stake. An investor might provide £100,000 in exchange for 5% equity plus 3% of monthly revenue until they've received 1.5x their money back. It's not as clean as pure equity or pure debt, but it aligns everyone's interests—the investor wants you to grow revenue, and you're not giving away half your company to get there. Sure, the terms can get complicated (you'll definitely need a good solicitor), but for apps with predictable revenue streams like subscription-based SaaS products, this structure can be brilliant. I worked with a fitness app that used exactly this model to scale from 5,000 to 50,000 paying subscribers without losing control of their business.

How Much Equity Should You Actually Give Away

Right, so you've decided equity is the way forward—but how much should you actually part with? I've watched founders give away far too much too early, and its painful to see because once its gone, you cant get it back. The standard range for an app development partner taking equity is anywhere from 5% to 25%, depending on what they're bringing to the table and when they're joining your journey.

Here's the thing though; equity should reflect the real value being contributed, not just a made-up number that sounds fair. If I'm building your entire MVP, handling the technical architecture, and sticking around for ongoing support and iterations, that's worth more than if I'm just coding screens you've already designed. I worked on a healthtech app where the founders offered 15% for full development plus six months of post-launch support—that felt about right because we were there through user testing, dealing with NHS compliance issues, and fixing bugs at midnight when they popped up.

What Different Equity Stakes Actually Mean

You need to think about dilution too. That 20% you give away now becomes 10% after your next funding round, then maybe 5% after that. Its simple maths but people forget this constantly. Most investors want to see founders holding at least 60-70% collectively before they'll even consider putting money in, because if you've given away too much equity too early, it signals you didn't understand the value of your own business.

The Founder's Equity Breakdown

For an app business specifically, here's what I typically see working:

• Founders collectively: 70-80% (split between you based on contribution)
• Development partner or technical co-founder: 10-20%
• Early employees and advisors: 5-10% (using an option pool)
• Reserved for future funding rounds: at least 10-15%

The biggest mistake? Giving your development agency 30% because they said they'd build everything for free. I mean, it sounds great until you realise you've just given away nearly a third of your company for something that might cost £40k if you paid cash. Do the maths—if your app business could realistically be worth £2 million in three years, that 30% just cost you £600k. Was the development work really worth that? Probably not, unless they're genuinely committed long-term and bringing more than just code to the table.

Getting Your App Valued Properly

Here's something that catches out most founders—they either massively overvalue or undervalue their app when seeking investment. I've seen people walk into meetings asking for £500k for 5% of a company that's literally just a wireframe and a domain name. And I've also watched brilliant founders give away 40% equity for what should have been a 15% deal because they didn't understand how to value what they'd built.

The truth is app valuation isn't like valuing a traditional business with physical assets and steady revenue streams. Its more art than science, especially pre-revenue. When we value apps for our clients or help them prepare for investor meetings, we look at a few key factors that investors actually care about. First up is your user metrics—daily active users, retention rates, and engagement time matter way more than total downloads. An app with 10,000 highly engaged users is worth more than one with 100,000 users who open it once and never return. Then there's your tech stack and IP; if you've built proprietary technology or have unique data sets, that adds real value. Revenue (if you have it) gets multiplied based on your industry—SaaS apps might get 5-8x annual revenue whilst e-commerce apps typically see 2-3x because of lower margins.

Don't try to value your app yourself when negotiating with investors. Pay for a proper valuation from someone who understands the mobile space—it'll cost you £2-5k but could save you from giving away far too much equity or scaring off investors with unrealistic numbers.

Common Valuation Methods for Apps

Different investors use different approaches, and knowing these helps you understand their offers:

• Comparable company analysis—looking at what similar apps in your space raised and at what valuation
• Scorecard method—comparing your startup against typical angel-funded companies on factors like team, product, and market size
• Berkus method—assigning value to specific milestones like having a working prototype, early revenue, or strategic relationships
• Discounted cash flow—projecting future revenue and working backwards (only works if you have solid financial history)
• Cost-to-duplicate—calculating what it would cost to build your app from scratch, though this usually undervalues apps significantly

One mistake I see constantly is founders focusing purely on development costs when thinking about value. Just because you spent £80k building your app doesn't mean its worth £80k. I've worked on apps that cost £120k to build but were valued at £2m because of the market opportunity and traction. And I've seen apps that cost £200k to develop struggle to find any investors because the market didn't care about the problem they were solving. Your app's value comes from its potential to generate returns, not from how much money you've already burned through getting it built.

What Investors Look for in Mobile App Startups

I've sat in pitch meetings with founders who had genuinely brilliant app concepts but walked away empty-handed because they couldn't answer the one question every investor asks: how are you going to acquire users profitably? You see, investors don't just want to hear about your app's features or how clever your technology is—they want to see that you understand your unit economics inside and out. What does it cost you to acquire a user? What's their lifetime value? How long until they become profitable? These aren't just nice-to-have numbers; they're the foundation of whether your business model actually works. I've watched countless founders stumble here, presenting beautiful apps with no clear path to sustainable growth.

The second thing investors scrutinise is your retention metrics. Sure, getting downloads is great, but if 90% of your users disappear after the first week, you don't have a business—you have an expensive marketing exercise. When I work with app startups, I always push them to obsess over their Day 1, Day 7, and Day 30 retention rates before they even think about pitching investors. A fintech app I helped build had a retention problem early on; users would sign up but never complete their first transaction. We stripped back the onboarding flow, reduced the steps from eight to three, and our Day 7 retention jumped from 12% to 38%. That's the kind of traction investors want to see.

Investors also look for defensibility. What stops a competitor with deeper pockets from copying your app in six months? Maybe its your proprietary data, your network effects, or exclusive partnerships. Whatever it is, you need to articulate it clearly. And honestly? Most apps don't have a strong moat, which is why many investors pass even on apps with decent traction. Your team matters too—have you built and shipped apps before, or is this your first rodeo? Experience counts for a lot when things inevitably go wrong.

Another crucial factor is your understanding of pricing strategy and monetisation. Investors want to see that you've done the research on what users will actually pay for your app, not just what you think they should pay. They're also looking at your acquisition strategy—do you know how to balance user engagement without being pushy about sharing and viral growth?

Conclusion

Look, I'll be honest with you—there's no universal right answer to the equity versus loan question. I've watched clients make both choices work brilliantly, and I've seen others regret their decision within months of signing the paperwork. The difference usually comes down to understanding their specific situation rather than following some generic startup advice.

After working on over a hundred app projects with wildly different funding structures, I can tell you this: the best choice depends on where your app is in its lifecycle, how much control matters to you, and whether you genuinely need more than just money. If you're building something in a space you don't fully understand yet—say, a complex healthcare app that needs regulatory guidance—having investors who've been there before can save you years of painful mistakes. But if you've got a proven model and just need capital to scale, taking on debt keeps things simpler and leaves you in the drivers seat.

What keeps me up at... what really matters is that you go into this decision with your eyes open. I've seen founders give away 40% equity for £50k when a small business loan would've cost them maybe £8k in interest over three years. That's a £200k mistake if the app succeeds. And I've seen others bootstrap for so long that competitors with proper funding swept in and dominated the market they pioneered.

Whatever you choose, make sure its actually funding the right things—user acquisition, proper development, marketing that works. Because an app without users is just expensive code sitting on a server somewhere, and no amount of funding changes that reality.