Well I think it really depends on quite a few factors,
Jan 29 2014 01:33 AM
1. No obligation to pay dividends.
Raising money through equity doesn't make the company liable to pay dividends to its stakeholders, it may decide to add the profits to the reserves. In case of debt there is always some interest that the company will have to pay. So in this case equity is better.
2. Ease to raise debt or equity.
On this front it gets all relative and a lot depends on the perception of the stakeholder you are dealing with. In case you want to raise debt you need to have strong free cash flow. This is one of the most important factor among other things. So if the company needs funds and can service the debt well, raising debt could be a good option.
In case of equity the important factors for the stakeholder would be the business idea, the sector, the long term goals etc. The stakeholder could be lenient on the FCF as at its not about the cash flow for the stakeholder here. He could be looking at good valuation for his shares and may come with an exit plan too like most VC's do.
Depending on the situation, the company on can take a call on what could be better. For eg. A start up would most probably raise money by giving away some share in the company to some investor by pitching him/her the idea. They wont be having promising picture when it comes to cash flow, at this early stage.
3. Personal choice of the founder.
If the founders are keen to keep 100% control, over the company, with themselves they would try to raise debt.
4. Tax implication.
Interest is an expense before the tax is calculated. It gets your profits down and thus the tax too. Whereas dividend is not an expense (even though the company will have to part away with its profits). Thus there wont be any benefit here.
I will add to the answer later if I am able to think of anything more or if I have missed any point :)