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Gotcha, I guess my assumption was that they were taking on debt to improve value not buy new furniture :) Joking aside, I wonder how this is different than say
by danvoell 7y ago
Gotcha, I guess my assumption was that they were taking on debt to improve value not buy new furniture :) Joking aside, I wonder how this is different than say late stage investor preferential rights? Debt would seem better to the company since preferential equity is somewhat covered on the downside and partakes in the upside.
- raiyu 7y agoYes that's correct. As long as you service the debt you are basically just paying an interest rate to use additional funds but retain future upside for shareholders. Versus selling equity you can burn through the capital without repercussion however you are also giving away future upside. Also the benefit to a debt is that banks want to be repaid. The last thing they want is for the company to go out of business so there is a much larger review of the financials of the company. This forces good accounting practices as well as good spending behavior. Versus when you sell equity you don't really have those same financial controls and as has become more and more common especially in the last few years companies then go and spend that capital inefficiently to grow their revenue base but never get their costs under control. Then you end up with a business model that doesn't work. The most recent example of which is Casper. Which raised well over $300MM in equity but is still losing $60-80MM a year and required an IPO to continue financing their suboptimal business model. The investors here got burned because the last private valuation was $1B and now that it is publicly traded it is $419MM.