4 ms·
It’s a matter of who gets paid first. To oversimplify... Let’s say I have a company with 100M in debt. If the company is sold for 150M. The first 100M goes
by mathattack 8y ago
It’s a matter of who gets paid first. To oversimplify...
Let’s say I have a company with 100M in debt. If the company is sold for 150M. The first 100M goes to pay debt. The other 50M goes to the owners. If it’s sold for 300M, then 200M goes to equity. They get all the upside. On the flip side if the company sells for less than 100M, the all the money goes to the debt holder.
What’s going on is debt holders trade upside for downside protection. Equity holders give up downside protection to get equity.
Life is a little more complicated (some equity holders have more protection than others, and some equity holders may be debt holders) but usually it’s just trading off upside for downside or vice versa.
- mirimir 8y agoOK, thanks. So in this case, are you saying that the initial investors had equity, but held little or no debt? So they retain equity, but the company has no equity, so they have nothing? And the new investors are paying off debt to service providers etc? And also getting some equity?
- mathattack 8y agoWhen companies are worth less than their debt obligations, the debt holders get all the claims. This means all the revenue in a sale, or they can wind up owning the company. (This is oversimplified but directionally correct) With Birchbox, one equity investor later provided debt. Others didn’t. When the company dropped in value, the debt holder wound up owning the whole thing. Sears seems to going through something similar at a larger scale.