4 ms·

You should consider that: a) The company can always go tits up at any moment without prior warning, however unlikely it appears to be now. A loan will always b

by Mahn 10y ago

You should consider that: a) The company can always go tits up at any moment without prior warning, however unlikely it appears to be now. A loan will always be riskier for the founders (personal liability) even if they are printing money right now. b) Investors want a shot at making 10x or 100x, even if that means a lot more risk. Handing a loan is safer, but you only get to make 1.4x at best; that's not the game they want to play.

mattkrause 10y ago
> A loan will always be riskier for the founders (personal liability) Can you explain? I thought that a major advantage of incorporation (rather than a sole proprietorship or parternship) was that corporate debts are separated from personal debts, so the investors (including founders) would only be liable for money actually invested in the company.
- Mahn 10y ago
  That's typically the case, but if you take a business loan from an old school bank, the bank will usually ask the founders to sign with personal liability on top, regardless the company status. It's a different kind of deal because with a loan the bank doesn't get to own a share of the company, so their profits depend exclusively on the company not going out of business until the loan + interest are paid out.
  - mattkrause 10y ago
    But surely this must depend on the size of the business? I could imagine this happening when Uncle Enzo wants to open a little pizzaria as a retirement hobby/business, but there's no way Eric Schmidt and Larry Page are on the hook when Google wants to finance something. Also wouldn't the bank end up owning a share of the company (or the company's stuff) if they did default?
    - Mahn 10y ago
      Sure, my experience is that a bank will always ask for some sort of security with old fashioned loans, but I can't pretend I know what kind of deals would a billion dollar company get. But even if personal liability isn't on the line, things like having the bank seize your assets if you can't repay would still be an undesirable liability. As for the bank owning shares, sure if you default they'll take over whatever they can get, as far as the contract goes, but it's not the same kind of deal. VCs or angels effectively buy shares to sell them later at a higher price, whereas the bank is just lending money and hoping to see it back with interests; the bank may take over ownership of the company if it goes bankrupt but it's not like they'd be able to sell it for much profit, if any at all.

by Mahn 10y ago

mattkrause 10y ago

> A loan will always be riskier for the founders (personal liability) Can you explain? I thought that a major advantage of incorporation (rather than a sole proprietorship or parternship) was that corporate debts are separated from personal debts, so the investors (including founders) would only be liable for money actually invested in the company.

Mahn 10y ago
That's typically the case, but if you take a business loan from an old school bank, the bank will usually ask the founders to sign with personal liability on top, regardless the company status. It's a different kind of deal because with a loan the bank doesn't get to own a share of the company, so their profits depend exclusively on the company not going out of business until the loan + interest are paid out.
- mattkrause 10y ago
  But surely this must depend on the size of the business? I could imagine this happening when Uncle Enzo wants to open a little pizzaria as a retirement hobby/business, but there's no way Eric Schmidt and Larry Page are on the hook when Google wants to finance something. Also wouldn't the bank end up owning a share of the company (or the company's stuff) if they did default?
  - Mahn 10y ago
    Sure, my experience is that a bank will always ask for some sort of security with old fashioned loans, but I can't pretend I know what kind of deals would a billion dollar company get. But even if personal liability isn't on the line, things like having the bank seize your assets if you can't repay would still be an undesirable liability. As for the bank owning shares, sure if you default they'll take over whatever they can get, as far as the contract goes, but it's not the same kind of deal. VCs or angels effectively buy shares to sell them later at a higher price, whereas the bank is just lending money and hoping to see it back with interests; the bank may take over ownership of the company if it goes bankrupt but it's not like they'd be able to sell it for much profit, if any at all.