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> Everyone in Silicon Valley uses equity, and not debt, to fuel their growth because debt is not available in sufficient quantities to poorly capitalized compan
by drewrv 9y ago
> Everyone in Silicon Valley uses equity, and not debt, to fuel their growth because debt is not available in sufficient quantities to poorly capitalized companies without a strong history of adequate cash flows to service debt.
A corollary to this is that if you're fundraising and can get debt, you should take it over equity almost every time. Many founders are skeptical of debt because everyone takes equity, yet everyone takes equity because it's all they can get.
At the very least, if you're seriously trying to decide between the two, remember that equity investors want at least a 10x return within about five years. Break out a calculator and look at what the interest rate on that would be (spoilers, it's higher than any lender would think to ask).
- vm 9y agoNo no no. Debt is not universally better. Debt can wipe out companies. It requires payments that equity does not. Miss one payment and you're in default. It's extremely risky for companies that are young and volatile. Debt vs. equity is always a case-by-case situation. Debt is cheaper but comes with strings attached. Equity is pricey but more flexible.
- simonbyrne 9y agoBut it isn't in your creditor's interest that you go bankrupt either.
- emsy 9y agoThis. Being able to get debt should, in general, be a good indicator that your company might actually be valuable.
- saas_co_de 9y agoNot really. The easiest way to get a loan is to start a fast food franchise or build houses. Banks don't do innovation.
- valuearb 9y agoIt is if they lose faith in your ability to make a profit. Better to force you into bankruptcy and auction the IP and tangible assets than let you ride it down to zero.
- vm 9y agoBankruptcy can definitely be in the creditor's interest. It can take possession of the company's assets, and then sell them off to recover principal (in addition to many other outcomes - bankruptcy is complicated). Debt incentives do not align with equity.
- thecrazyone 9y agoI don't equity investments align in interest either - among Founders, angels, VCs, PEs and public shares. There's enough material to backup the struggle between any of these entities
- bdod6 9y agoI don't think debt would be worse for startups though. It's unlikely debt would wipe out a startup unless it continually finances through debt over a long period of time or just has really unfavorable debt terms (which wouldn't make sense for the debt issuer either). The problem is getting debt financing...but I would imagine debt financing would make sense for 99.99% of startups.
- pc86 9y ago> Miss one payment and you're in default. I mean this is just factually wrong. Sure you'll rack up fees, it gets expensive quick, and there's generally no good reason to do it, but you're not in default until you're in default - and missing 1 payment is not going to do that.
- bdod6 9y agoI wonder if debt is "not available" simply because it's not the standard for SV. I would bet that companies like Slack, Stripe, Stitchfix, etc could have raised considerable amounts of debt instead of raising money through their last rounds. It's essentially a self-fulfilling prophecy.
- deleted 9y ago[deleted]
- Clubber 9y agoThe general rule is don't start a company with your own money. I've heard this several times by people who have done it. When you incur debt, you have to put up collateral (i.e. your house). They won't just give it to a new company. I assume you don't start up a company with your own money is that it can fail and personally bankrupt you in the process. Because of that, it would hinder your judgement? Not sure. Maybe someone can fill me in on that.