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Having debt is structurally completely different from having (equity) investors. The entire financial incentive, risk, and payout structure behind taking on deb

by loeber 9y ago

Having debt is structurally completely different from having (equity) investors. The entire financial incentive, risk, and payout structure behind taking on debt is unlike that of selling off equity. In this case, Netflix is much worse off having taken on large amounts of debt. I hope this response isn't too brusque, but I strongly suggest you read an introductory finance textbook.

rayalez 9y ago
Could you summarize what makes debt worse than having investors? I'm curious, it seems counterintuitive, with debt you don't have to give up a part of your company or lose any control.
- continuations 9y ago
  Debt usually comes with strict repayment schedule. If you don't have enough cash flow to meet the repayment schedule you go into default. The debt holders force you into bankruptcy. You lose the entire company.
  - erikb 9y ago
    Well, does a creditor have to push you into bankruptcy? They seldomly do, because then they can't squeeze more money or control out of you. And at the same time an investor could also push you into bankruptcy by suggesting, supporting or blocking certain decisions. It's like knight and bishop in chess. True, they work differently, but they are all just pieces on the same board, used in the same game to achieve the same goal.
- rjtavares 9y ago
  Debt can cause a liquidity problem, equity can't. Lack of liquidity (i.e. of available cash) can be a huge problem even for profitable companies, potencially causing a bankruptcy.
- abhi3 9y ago
  You have to pay back debts which can be a problem if you don't have adequate liquid assets. If you can't pay it back your company will go into liquidation where all its assets will be sold to the highest bidders and proceeds will first pay back creditors and then preference share holders, you'll be lucky if there's anything left for you after that as a founder.
charlesdm 9y ago
Yes it is structurally different. However, it is also a much cheaper source of funding, especially in the current low interest rate climate. I have no clue on the metrics of Netflix, but if spending $50 or $100m on a show gets you an added $3m in MRR then it's clearly worth it for them, since they're trading at a p/e ratio of 225. Either they become so profitable they can repay the debt, or their market cap increases significantly + can raise additional capital from share sales at some point (at obscene valuations, I might add, but then again they seem to have been performing) and repay the debt. Then again, I have no clue how much each show adds in MRR. It could very well be much less than $3m MRR. But there's pretty much no alternative to developing your own content -- without it Netflix wouldn't be where it is today. Requires a ton of capital though.
PhantomGremlin 9y ago
I strongly suggest you read an introductory finance textbook. To save people some time, here's a 23 second long explanation of why having debt is bad. In short, it takes priority over other obligations: https://www.youtube.com/watch?v=3XGAmPRxV48 https://www.youtube.com/watch?v=3XGAmPRxV48

by loeber 9y ago

rayalez 9y ago

Could you summarize what makes debt worse than having investors? I'm curious, it seems counterintuitive, with debt you don't have to give up a part of your company or lose any control.

continuations 9y ago
Debt usually comes with strict repayment schedule. If you don't have enough cash flow to meet the repayment schedule you go into default. The debt holders force you into bankruptcy. You lose the entire company.
- erikb 9y ago
  Well, does a creditor have to push you into bankruptcy? They seldomly do, because then they can't squeeze more money or control out of you. And at the same time an investor could also push you into bankruptcy by suggesting, supporting or blocking certain decisions. It's like knight and bishop in chess. True, they work differently, but they are all just pieces on the same board, used in the same game to achieve the same goal.
rjtavares 9y ago
Debt can cause a liquidity problem, equity can't. Lack of liquidity (i.e. of available cash) can be a huge problem even for profitable companies, potencially causing a bankruptcy.
abhi3 9y ago
You have to pay back debts which can be a problem if you don't have adequate liquid assets. If you can't pay it back your company will go into liquidation where all its assets will be sold to the highest bidders and proceeds will first pay back creditors and then preference share holders, you'll be lucky if there's anything left for you after that as a founder.

charlesdm 9y ago

Yes it is structurally different. However, it is also a much cheaper source of funding, especially in the current low interest rate climate. I have no clue on the metrics of Netflix, but if spending $50 or $100m on a show gets you an added $3m in MRR then it's clearly worth it for them, since they're trading at a p/e ratio of 225. Either they become so profitable they can repay the debt, or their market cap increases significantly + can raise additional capital from share sales at some point (at obscene valuations, I might add, but then again they seem to have been performing) and repay the debt. Then again, I have no clue how much each show adds in MRR. It could very well be much less than $3m MRR. But there's pretty much no alternative to developing your own content -- without it Netflix wouldn't be where it is today. Requires a ton of capital though.

PhantomGremlin 9y ago

I strongly suggest you read an introductory finance textbook. To save people some time, here's a 23 second long explanation of why having debt is bad. In short, it takes priority over other obligations: https://www.youtube.com/watch?v=3XGAmPRxV48 https://www.youtube.com/watch?v=3XGAmPRxV48