Equity (stock/shares) represents the ownership of a business. Debt (bonds) represents a loan to a business. Learn more about the implications of these differences below.
Equity:
When you are selling/offering equity you are selling a piece of the ownership of the corporation and the buyer will become a shareholder. Selling equity from a corporation will dilute the ownership of the existing owners, based on the number of new shares being issued.
Companies can create several different sub-types of equity. These sub-types are separated by share class; each share class has shared rights and privileges. Click here to learn more about corporate governance and creating share classes.
The rights of these new shareholders will be governed by both the shareholders' agreement, and the amendment to the articles of incorporation which created the share class. When issuing equity to investors, depending on the class of equity issued, corporations can choose whether or not to promise any fixed payments (dividends), but most equity does not include any promise of repayment.
At the same time, these new shareholders will share in any future profits or payments made to shareholders (dividends) as per the rights of their respective share class.
Debt:
When you are offering/issuing debt you are taking a loan from investors to the business. As part of the terms of that arrangement, the company must promise to repay the entire original loan (the principal) in the future, and may also promise annual or quarterly payments of interest. The company must repay the debt based on the terms or face going bankrupt. Once the debt is repaid, the holders of the debt have no rights to the profits of the business, nor do they have any other rights given to shareholders.
The higher the risk of the company, the higher percent interest debt holders will demand. Startups often are required to pay over 10% interest per year, which can be a large drain on available cash for a new business.