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Limited companies go bankrupt all the time. Do we consider it an "ethical failure" when some VC funded company folds, leaving a whole bunch of people they owe m

Limited companies go bankrupt all the time. Do we consider it an "ethical failure" when some VC funded company folds, leaving a whole bunch of people they owe money to with nothing?

ericd 10y ago
A little bit, yeah. The leaders of those businesses made promises to people, and they failed to uphold them.
- whatnotests 10y ago
  Define "promise" in this context though. VCs invest in opportunity, not promises.
  - ericd 10y ago
    The person I replied to specifically mentioned owing money, so I took it to mean that he wasn't talking about the investors. I do think that a business owner who is unable to pay people he owes should feel bad about it, and should make every effort to pay them back. Just because he's legally off the hook doesn't take him off the hook ethically, in my opinion. But regardless, you should try to make your investors whole, if at all possible. I view that as your ethical responsibility as someone who receives investment.
- goneri 10y ago
  Promises only bind those who believe. Those pepole are paid to evaluate the risk.
- ceejayoz 10y ago
  If I promise to meet you for coffee, it's understood that there's a silent "but not if my wife winds up in the ER". If I promise to pay you back a loan, it's understood that the interest rate you'll charge me is related to the risk of my defaulting and that the option exists.
  - ericd 10y ago
    That interest rate doesn't in any way relieve you of your moral responsibility to pay back that loan, in my opinion, just because you run into financial trouble. People defaulting just because it's legal causes interest rates to rise on others, and imposes costs on the rest of society. Of course, it's important for social reasons for there to be legal ways to get out of inescapable debt, but you're not off the hook morally, in my opinion, if you bit off more than you could chew. It's both your fault and that of the lender if you borrow more than you can handle. This isn't usually some freak unforeseeable accident. The 2007 crisis was caused as much by people overlevering themselves to take advantage of a situation as it was by predatory lending practices and greed/fraud at the I Bank level. But people love to put all the blame on the banks, and none on themselves for not being prudent.
    - tanderson92 10y ago
      > It's both your fault and that of the lender if you borrow more than you can handle. Then why does the borrower have moral culpability in addition to financial culpability, while the lender only takes a financial haircut.
      - ericd 10y ago
        I think lenders have an ethical responsibility to not put borrowers in a bad position as well.
    - foobarrio 10y ago
      If a bank is making loans at rates that do not cover defaults they should go out of business because they are crappy at their job. If I take my car to a mechanic am I expected to know as much about my car as the mechanic? Do I tear down and redo/inspect any work they do to my car? If I go to a mechanic and ask them if it's okay to do something dangerous to my car and they go ahead and do it, I'd say the mechanic is way more on the hook morally than the idiot driver. Similarly if I go and ask for a 1,000,000 USD mortgage when I'm only making $20,000 USD a year and have no savings or investments and the bank gives it me... You're saying both me and bank are on equal moral footing? You would then have to ask what incentive the bank had to give me the money. Either they are greedy and wanted to charge a super high rate or they intended to pass the buck and sell the loan which can be fraud if they lie about my credit worthiness to the next buyer of the loan.
lf275 10y ago
It's not an ethical failure because most of the participants understand that it is high risk/reward. That is why most start-up firms offer equity to their employees, and it is almost impossible for a new startup to borrow debt from banks (unless its personally guaranteed, or extremely expensive) before it has gained traction with its business model. On the other hand, governments are perceived to be reliable borrowers, so they can receive low interest rate loans and are expected to repay their debt. There is not really a way for governments to issue equity like companies, so if governments become lackadaisical about paying their debts, then we should expect their loans to become much more expensive as well, and this could aggravate the financial distress of many high indebted public entities that are already struggling to pay the bills.
- azernik 10y ago
  It's understood to be low-risk, but not zero risk.
  - lf275 10y ago
    True, I don't look at it as an ethical failure either way. I am saying, however, that the public/federal government have an interest in maintaining the perception that that is a one-off and state/local governments are reliable borrowers. If a string of bankruptcies happen in a short time window, this could quickly erode the perception that state governments are reliable, and negatively impact many other states that are struggling and need low-interest financing just to pay the bills. For anybody who has taken a look at the balance sheets of public entities, it is shocking how poorly capitalized many of these local governments actually are, and how aggressive some of their financial assumptions are (with low interest rates and 50% of their capital held in debt, a 8% assumed rate of return is extremely aggressive, and they would need financial rock-stars to achieve this at their scale). If investors are spooked, then interest rates could spike for many other government loans, and cause contagion among local government entities that would eventually require the federal government to intervene.
- vkou 10y ago
  > this could aggravate the financial distress of many high indebted public entities that are already struggling to pay the bills. Governments don't make payments at adjustable-interest rates. If sovereign borrowing rates rise, because the financial markets decide that sovereigns have a higher rate of default then they thought before, this doesn't affect outstanding debt - only the ability to get more.
prostoalex 10y ago
Those people are not stuck with the bankrupt startup for the rest of their lives. The same cannot be said about Puerto Ricans.
- throwaway2048 10y ago
  Being stuck with crippling debt that destroys GDP faster than it can be repaid (leading to a deflationary spiral that makes it impossible to EVER pay your debt) is a massively worse alternative, which you are also stuck with the rest of your life.

Limited companies go bankrupt all the time. Do we consider it an "ethical failure" when some VC funded company folds, leaving a whole bunch of people they owe money to with nothing?

ericd 10y ago

A little bit, yeah. The leaders of those businesses made promises to people, and they failed to uphold them.

whatnotests 10y ago
Define "promise" in this context though. VCs invest in opportunity, not promises.
- ericd 10y ago
  The person I replied to specifically mentioned owing money, so I took it to mean that he wasn't talking about the investors. I do think that a business owner who is unable to pay people he owes should feel bad about it, and should make every effort to pay them back. Just because he's legally off the hook doesn't take him off the hook ethically, in my opinion. But regardless, you should try to make your investors whole, if at all possible. I view that as your ethical responsibility as someone who receives investment.
goneri 10y ago
Promises only bind those who believe. Those pepole are paid to evaluate the risk.
ceejayoz 10y ago
If I promise to meet you for coffee, it's understood that there's a silent "but not if my wife winds up in the ER". If I promise to pay you back a loan, it's understood that the interest rate you'll charge me is related to the risk of my defaulting and that the option exists.
- ericd 10y ago
  That interest rate doesn't in any way relieve you of your moral responsibility to pay back that loan, in my opinion, just because you run into financial trouble. People defaulting just because it's legal causes interest rates to rise on others, and imposes costs on the rest of society. Of course, it's important for social reasons for there to be legal ways to get out of inescapable debt, but you're not off the hook morally, in my opinion, if you bit off more than you could chew. It's both your fault and that of the lender if you borrow more than you can handle. This isn't usually some freak unforeseeable accident. The 2007 crisis was caused as much by people overlevering themselves to take advantage of a situation as it was by predatory lending practices and greed/fraud at the I Bank level. But people love to put all the blame on the banks, and none on themselves for not being prudent.
  - tanderson92 10y ago
    > It's both your fault and that of the lender if you borrow more than you can handle. Then why does the borrower have moral culpability in addition to financial culpability, while the lender only takes a financial haircut.
    - ericd 10y ago
      I think lenders have an ethical responsibility to not put borrowers in a bad position as well.
  - foobarrio 10y ago
    If a bank is making loans at rates that do not cover defaults they should go out of business because they are crappy at their job. If I take my car to a mechanic am I expected to know as much about my car as the mechanic? Do I tear down and redo/inspect any work they do to my car? If I go to a mechanic and ask them if it's okay to do something dangerous to my car and they go ahead and do it, I'd say the mechanic is way more on the hook morally than the idiot driver. Similarly if I go and ask for a 1,000,000 USD mortgage when I'm only making $20,000 USD a year and have no savings or investments and the bank gives it me... You're saying both me and bank are on equal moral footing? You would then have to ask what incentive the bank had to give me the money. Either they are greedy and wanted to charge a super high rate or they intended to pass the buck and sell the loan which can be fraud if they lie about my credit worthiness to the next buyer of the loan.

lf275 10y ago

It's not an ethical failure because most of the participants understand that it is high risk/reward. That is why most start-up firms offer equity to their employees, and it is almost impossible for a new startup to borrow debt from banks (unless its personally guaranteed, or extremely expensive) before it has gained traction with its business model. On the other hand, governments are perceived to be reliable borrowers, so they can receive low interest rate loans and are expected to repay their debt. There is not really a way for governments to issue equity like companies, so if governments become lackadaisical about paying their debts, then we should expect their loans to become much more expensive as well, and this could aggravate the financial distress of many high indebted public entities that are already struggling to pay the bills.

azernik 10y ago
It's understood to be low-risk, but not zero risk.
- lf275 10y ago
  True, I don't look at it as an ethical failure either way. I am saying, however, that the public/federal government have an interest in maintaining the perception that that is a one-off and state/local governments are reliable borrowers. If a string of bankruptcies happen in a short time window, this could quickly erode the perception that state governments are reliable, and negatively impact many other states that are struggling and need low-interest financing just to pay the bills. For anybody who has taken a look at the balance sheets of public entities, it is shocking how poorly capitalized many of these local governments actually are, and how aggressive some of their financial assumptions are (with low interest rates and 50% of their capital held in debt, a 8% assumed rate of return is extremely aggressive, and they would need financial rock-stars to achieve this at their scale). If investors are spooked, then interest rates could spike for many other government loans, and cause contagion among local government entities that would eventually require the federal government to intervene.
vkou 10y ago
> this could aggravate the financial distress of many high indebted public entities that are already struggling to pay the bills. Governments don't make payments at adjustable-interest rates. If sovereign borrowing rates rise, because the financial markets decide that sovereigns have a higher rate of default then they thought before, this doesn't affect outstanding debt - only the ability to get more.

prostoalex 10y ago

Those people are not stuck with the bankrupt startup for the rest of their lives. The same cannot be said about Puerto Ricans.

throwaway2048 10y ago
Being stuck with crippling debt that destroys GDP faster than it can be repaid (leading to a deflationary spiral that makes it impossible to EVER pay your debt) is a massively worse alternative, which you are also stuck with the rest of your life.