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Financing Vehicles > Debt - Pg. 69

Financing a Game Development Venture Demanding investors, particularly thoseinterested in control of the company, mustbe scru- tinized very carefully. First, yourlegal bills for creating new classes of equityand negotiating the terms can spiral.Second, a powerful outsider can make youfeel like you're not quite in control of yourdestiny--and for most entrepreneurs, that'swhat makes the pain worthwhile. On theother hand, if you are working with a reputable and knowledgeable investor, youwould hope that they would be working forthe success of the company and your in- terests would be somewhat aligned. Debt 69 There are two main differences between debt and equity: debt usually does not participate in the success or upside of a company, and it receives payment priority (is repaid before other claims) in case the company runs into bankruptcy. Debt is a great idea for family and friends and angel in- vestors who are willing to extend unsecured loans. There are basically two kinds of debt, secured and unsecured . Secured debt is backed by some kind of collateral (an asset, like a car) that the creditor can take or sell if the debtor cannot satisfy the loan (ever see Repo Man ?). Your mortgage, for example, is secured by the home: if you default, the bank will take the home and sell it to satisfy the debt. Unsecured debt is not backed by an asset. Because unsecured debt is riskier for the creditor, it usually carries higher interest rates than secured debt. However, any kind of debt will usually be "cheaper" for the company than equity: because it has payment priority and is less risky than equity, debt investors are satisfied with lower returns on their investments. Depending on the risk/return objectives of a lender, some loans and debt instruments (sometimes called notes ) may be issued with warrants (options to buy stock at a set price) or be convertible into equity upon a future event.