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“Debt helps you grow faster; debt helps you die faster.” - someone said this to me early in my career and it has stuck with me.

• himaraya 7y ago
  Ditto for equity
  • looping__lui 7y ago
    ?
    • corford 7y ago
      Sky high valuations that limit your options/exits, potentially pushing your company down a path it shouldn't take.
      • looping__lui 7y ago
        ... based on false and unrealistic promises? When did the discussion about “financing structure” become a discussion on ethics? Or are you already taking the “bullshit business hockeystick promises” as a “given in the industry”? Why are fraudulent business practices the first thing that come to your mind? If you told me about WACC and how equity is like actually really expensive way of financing: ok, I get it, some cool discussion on a provocative questionmark. Kind a telling on the industry in a sense :-D
    • caspper69 7y ago
      You can't maintain anything for free; everything has a carrying cost-- even cash in the form of depreciation. Use it or lose it as they say.
      • samsonradu 7y ago
        Not everything depreciates over time, does it? Looking at housing in many hot markets or at collectible watches fe.
        • looping__lui 7y ago
          You have something called opportunity costs. Equity is the most expensive financing - especially for startups. The opportunity costs for funding a “high risk of failure startup” that even just has your money sitting on a bank account is fairly high. When S&P500 markets return 20% p.a. - I’d wanna see 100+% return p.a. on my risky startup (it is of course less of a normal distribution kind of thing, more a “lose many and maybe win one”). So actually due to inflation and the opportunity costs associated with the risks you have - stuff may or may not depreciate unknowingly. Watches are only gonna be worth what a seller gives you when the need of selling it arises. Correlation breakdown between asset classes etc etc has made many people not so happy about the decisions they made with more exotic investments and the believe that “not everything depreciates”. A more fundamental and underlying problem may be: we print too much money and inflation is probably hitting insane levels but “hidden well beneath the improvements in society’s productivity”. In a Knightean’s risk sense, we may actually be constantly facing “uncertainty” but believe we are dealing with a more predictable concept of “risk” in our lives. Taleb has written a few good books on it.
    • looping__lui 7y ago
      Guys, take an Accounting 101 class before starting to downvote my questionmark. I’ll take your equity any time. Your debt not so much. Burning through other people’s cash on false promises IS NOT the same as having a more equity heavy financing. Either you fund your companies operations through equity or you fund it through debt. So how on earth are you going to fund a company if you don’t want to do equity or debt? I’m an equity guy. Funded all my shit with my own money and enjoyed the upside. So you’ll get an exclamation mark you can downvote in addition in this post: !
  • pjc50 7y ago
    No - equity doesn't require servicing. Plenty of businesses have collapsed despite having positive margin and operating cash flow, but outstanding debt. It's almost a feature of the "private equity looting" model that killed Toys R Us and Maplin, among others.
    • icedchai 7y ago
      Don't forget about the dividends / interest usually associated with preferred shares. Those are constantly accruing and need to be paid out before any "gains" make their way to common shareholders.
    • jklein11 7y ago
      Do you have examples of companies with positive margin and operating cashflow that went belly up because of outstanding debt? I would think the debt holders would rather cut a deal than let the company go belly up. $.50 on the dollar is better than zero cents on the dollar.
      • alexilliamson 7y ago
        But aren't the debt holders typically the first ones to be paid in a bankruptcy?
        • jklein11 7y ago
          Yeah true, I guess it wouldn't be a question of $.50 on the dollar vs nothing. Maybe extending the repayment period so that payments are lower but it increases the total financing costs? It just seems to me that if a company is doing something profitably, that would be the company I would want to lend money to.
          • ska 7y ago
            Or get your money out now in the first tranche and do something less risky with it? It’s not just the face they are profitable, it’s opportunity cost and risk also. If pulling out now screws everyone else involved,it’s not really their problem is it?
• ttul 7y ago
  Just understand your downside. Are your shareholders going to bail you out if you have a big customer loss and can’t service the debt or fall off covenant? What will your lender do? Are they going to throw a lock on the door and sell the chairs? It’s not necessarily the end of the world to default on secured debt. As a founder, you may he just fine after a lender-induces a recap. But don’t leave that all to chance. Understand the downside risk before you draw down on debt and be comfortable with it.