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> generally shouldn't raise debt, what are you going to pay the interest with, your negative profits? You should be raising equity. And that's the reason why t

> generally shouldn't raise debt, what are you going to pay the interest with, your negative profits? You should be raising equity. And that's the reason why the SBA loans that are part of the stimulus package are not going to save the small businesses they are supposed to be saving. Anyways, I can relate. I raised money through convertible notes instead of equity, because reasons. Then when we didn't do a valued round soon enough (2 years expiration), one of the investors called his note, sued, forced us into bankruptcy, bought the assets at auction, and is now suing me and my cofounder personally to repay his note. So, never doing that again. Debt is not a very good financing tool for small businesses that are exposed to a lot of risk (almost all of them right now).

deleted 7y ago
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tschwimmer 7y ago
Please name the investor so we can avoid working with them.
- deleted 7y ago
  [deleted]
JoshTriplett 7y ago
> suing me and my cofounder personally to repay his note On what grounds?
- H8crilA 7y ago
  If you don't pay interest on tjme you are in "default", and creditors take over the company. Old shares (stocks) are deleted, just like that. A loan is a contractual obligations. This is like the 101 of investing, understanding what the capital structure of a company is. Edit: ignore my comment; didn't realize the debt "leaked" through the corporate capital structure directly to the founders; I agree that investor is probably quite an asshole.
  - JoshTriplett 7y ago
    I was asking on what grounds someone could expect a personal guarantee from individual founders, rather than a guarantee from the business that no longer exists. (Unless the terms of the convertible note are particularly horrific.) (I'm not questioning that an investor via convertible note has the ability to call the note due from the company. The specific sentence quoted in my reply regarded the expectation of personal repayment after the company was driven into bankruptcy.)
    - deleted 7y ago
      [deleted]
    - hogFeast 7y ago
      Two reasons occur: personal guarantee on the note (I have no idea whether this occurs where this person lives...it isn't something I would ever do, no matter the circumstance) or fraudulent conveyance (i.e. the executives start stripping assets when the company goes into BK, afaik this is a civil action that can be brought against executives either by creditors themselves or trustees).
- smallgovt 7y ago
  Investor must be claiming fraud or gross negligence.
  - ta1234567890 7y ago
    Investor is suing for breach of contract (the unpaid convertible note), trying to "pierce the corporate veil" by claiming alter-ego. In the end we'll "win" this, but that will not save us from having to spend $50-$150k in lawyers to resolve it (if this goes all the way to trial, it's about 18-24 months of paying lawyers which cost about $500/hr, at about 10hrs/month).
    - gnopgnip 7y ago
      Doesn't the D&O insurance cover this?
      - ta1234567890 7y ago
        Unfortunately we didn't have insurance. That's a great tip btw.
    - smallgovt 7y ago
      Best of luck. I've been through something similar and know how stressful it can be. When closing my last startup, we purchased a D&O tail policy to cover cases like this. It's a good way to buy a little peace of mind.
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nemo44x 7y ago
> And that's the reason why the SBA loans that are part of the stimulus package are not going to save the small businesses they are supposed to be saving. I’ve been assuming the best case scenario for them is to slow the death of many of them. Some will hang on for awhile, and the shorter this goes on the better the survival rate.
avalys 7y ago
The SBA loans will be FORGIVEN if you spend them on rent and payroll. Please excuse the all caps, but I think it's very important that this be as widely known as possible, so that someone doesn't let their business fail because they weren't aware of how this program works. https://restaurant.org/Articles/News/How-the-CARES-Act-SBA-loan-forgiveness-works https://restaurant.org/Articles/News/How-the-CARES-Act-SBA-l... The program is not perfect and there are restrictions, but if you qualify, this is basically a grant, not a loan. It uses the existing SBA loan infrastructure so that the money can be disbursed very quickly through commercial banks.
- ta1234567890 7y ago
  > it's very important that this be as widely known as possible, so that someone doesn't let their business fail because they weren't aware of how this program works. Agreed. So let's clarify a few things. For the loan to be forgiven, you first need to be able to get it. From NYTs SBA loans page[1]: > You must apply through a bank or other lender, so start by contacting one you already have a relationship with. Many banks are imposing restrictions and choosing to work only with their existing business customers. > The Treasury Department said the program would start taking applications on April 3, a week after the bill was signed into law. But the department didn’t give lenders necessary technical information until just hours before the program was scheduled to start — and lenders are still waiting for some key guidance and documents, bankers said. Many are still developing their application rules and systems. Most businesses that need the loans have been closed for 2-3 weeks now and it will most likely take at least another 2-3 weeks for them to see any money from those loans in their bank accounts[0,1], if they are lucky enough to qualify. Very few can wait that long before having to close for good. Then, if you are able to get a loan, there are very important limitations to forgiveness (from the link in your comment): > Your forgiveness amount equals your total payroll costs multiplied by the average number of FTE employees you retained for the eight weeks following the date of your loan origination > You must spend at least 75% of your loan on payroll. From another, more recent, article[1]: > The agency said that “not more than 25 percent” of the forgiven amount may be used for nonpayroll costs, like rent. So you only get up to 8 weeks of payroll, from the moment you get the loan (it won't cover anything you already paid), and then at least 75% must be used for payroll. So for example a restaurant, is very unlikely to be able to meet those requirements, because they are barely employing anyone right now, and their biggest expense is their lease, which they won't be able to cover with 25% of the PPP loan that should be used for their payroll. The restaurant would then need another loan to pay the lease, but that's a super risky loan, both for them and for the bank - the bank will probably not approve them and if they did, it would be under very bad terms for the restaurant. Banks are not in the business of losing money. 0: https://money.com/sba-loans-stimulus-ppp-application-requirements/ https://money.com/sba-loans-stimulus-ppp-application-require... 1: https://www.nytimes.com/article/small-business-loans-stimulus-grants-freelancers-coronavirus.html https://www.nytimes.com/article/small-business-loans-stimulu...

deleted 7y ago

[deleted]

tschwimmer 7y ago

Please name the investor so we can avoid working with them.

deleted 7y ago
[deleted]

JoshTriplett 7y ago

> suing me and my cofounder personally to repay his note On what grounds?

H8crilA 7y ago
If you don't pay interest on tjme you are in "default", and creditors take over the company. Old shares (stocks) are deleted, just like that. A loan is a contractual obligations. This is like the 101 of investing, understanding what the capital structure of a company is. Edit: ignore my comment; didn't realize the debt "leaked" through the corporate capital structure directly to the founders; I agree that investor is probably quite an asshole.
- JoshTriplett 7y ago
  I was asking on what grounds someone could expect a personal guarantee from individual founders, rather than a guarantee from the business that no longer exists. (Unless the terms of the convertible note are particularly horrific.) (I'm not questioning that an investor via convertible note has the ability to call the note due from the company. The specific sentence quoted in my reply regarded the expectation of personal repayment after the company was driven into bankruptcy.)
  - deleted 7y ago
    [deleted]
  - hogFeast 7y ago
    Two reasons occur: personal guarantee on the note (I have no idea whether this occurs where this person lives...it isn't something I would ever do, no matter the circumstance) or fraudulent conveyance (i.e. the executives start stripping assets when the company goes into BK, afaik this is a civil action that can be brought against executives either by creditors themselves or trustees).
smallgovt 7y ago
Investor must be claiming fraud or gross negligence.
- ta1234567890 7y ago
  Investor is suing for breach of contract (the unpaid convertible note), trying to "pierce the corporate veil" by claiming alter-ego. In the end we'll "win" this, but that will not save us from having to spend $50-$150k in lawyers to resolve it (if this goes all the way to trial, it's about 18-24 months of paying lawyers which cost about $500/hr, at about 10hrs/month).
  - gnopgnip 7y ago
    Doesn't the D&O insurance cover this?
    - ta1234567890 7y ago
      Unfortunately we didn't have insurance. That's a great tip btw.
  - smallgovt 7y ago
    Best of luck. I've been through something similar and know how stressful it can be. When closing my last startup, we purchased a D&O tail policy to cover cases like this. It's a good way to buy a little peace of mind.

deleted 7y ago

[deleted]

nemo44x 7y ago

> And that's the reason why the SBA loans that are part of the stimulus package are not going to save the small businesses they are supposed to be saving. I’ve been assuming the best case scenario for them is to slow the death of many of them. Some will hang on for awhile, and the shorter this goes on the better the survival rate.

avalys 7y ago

The SBA loans will be FORGIVEN if you spend them on rent and payroll. Please excuse the all caps, but I think it's very important that this be as widely known as possible, so that someone doesn't let their business fail because they weren't aware of how this program works. https://restaurant.org/Articles/News/How-the-CARES-Act-SBA-loan-forgiveness-works https://restaurant.org/Articles/News/How-the-CARES-Act-SBA-l... The program is not perfect and there are restrictions, but if you qualify, this is basically a grant, not a loan. It uses the existing SBA loan infrastructure so that the money can be disbursed very quickly through commercial banks.

ta1234567890 7y ago
> it's very important that this be as widely known as possible, so that someone doesn't let their business fail because they weren't aware of how this program works. Agreed. So let's clarify a few things. For the loan to be forgiven, you first need to be able to get it. From NYTs SBA loans page[1]: > You must apply through a bank or other lender, so start by contacting one you already have a relationship with. Many banks are imposing restrictions and choosing to work only with their existing business customers. > The Treasury Department said the program would start taking applications on April 3, a week after the bill was signed into law. But the department didn’t give lenders necessary technical information until just hours before the program was scheduled to start — and lenders are still waiting for some key guidance and documents, bankers said. Many are still developing their application rules and systems. Most businesses that need the loans have been closed for 2-3 weeks now and it will most likely take at least another 2-3 weeks for them to see any money from those loans in their bank accounts[0,1], if they are lucky enough to qualify. Very few can wait that long before having to close for good. Then, if you are able to get a loan, there are very important limitations to forgiveness (from the link in your comment): > Your forgiveness amount equals your total payroll costs multiplied by the average number of FTE employees you retained for the eight weeks following the date of your loan origination > You must spend at least 75% of your loan on payroll. From another, more recent, article[1]: > The agency said that “not more than 25 percent” of the forgiven amount may be used for nonpayroll costs, like rent. So you only get up to 8 weeks of payroll, from the moment you get the loan (it won't cover anything you already paid), and then at least 75% must be used for payroll. So for example a restaurant, is very unlikely to be able to meet those requirements, because they are barely employing anyone right now, and their biggest expense is their lease, which they won't be able to cover with 25% of the PPP loan that should be used for their payroll. The restaurant would then need another loan to pay the lease, but that's a super risky loan, both for them and for the bank - the bank will probably not approve them and if they did, it would be under very bad terms for the restaurant. Banks are not in the business of losing money. 0: https://money.com/sba-loans-stimulus-ppp-application-requirements/ https://money.com/sba-loans-stimulus-ppp-application-require... 1: https://www.nytimes.com/article/small-business-loans-stimulus-grants-freelancers-coronavirus.html https://www.nytimes.com/article/small-business-loans-stimulu...