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Things to know about raising debt for startups

b20000 5y ago
i will warn anyone against taking on convertible debt or government backed debt while also investing your own time and money in a company. i have been through this experience and sooner or later the debt will mature. this could mean that you lose all the IP you developed and the money invested. tread carefully. i have also tried to raise debt against considerable IP assets (not patents but actual implementations and products) and was never able to do that. this remains a huge opportunity to this day. raising debt against real estate or other traditional assets is nothing new and no point in writing an article on that. i would personally never borrow against my home no matter how much i believe in my company as there is always the unexpected event that can f** up everything.
- candiddevmike 5y ago
  I've been in this exact same situation and it is a real struggle. Banks and the SBA are incredibly useless when it comes to loans for startups/small tech companies, especially the clueless loan approval folks. Supposedly there are a number of government grants meant to help tech companies secure financing without taking on insurmountable debt, but I have yet to find them.
  - irjustin 5y ago
    > Banks and the SBA are incredibly useless when it comes to loans for startups/small tech companies I mean isn't that the point? Banks loan money for low risk which is why they're able to offer those low rates. Small usually means risky, not always, but definitely the default.
    - candiddevmike 5y ago
      Not necessarily, it's about collateral. Banks want real assets, not IP, which they value at 0. This isn't really the case though, it's just they don't know how to valuate it. Sure, it may be close to 0 in certain cases, but if someone with a collection of garage sale knick knacks can get a loan to open a flea market with their inventory as part of the collateral, why can't I with just IP?
      - duped 5y ago
        It's a lot harder to find someone to buy IP than baseball cards
        candiddevmike 5y ago
        Here's an idea: government backed loans for tech companies, and if they fail, the government gets the IP and releases it under some kind of FOSS license. Seems like a win-win.
        b20000 5y ago
        what if the govt lends you 100k but you spent 500k of your savings and time? now they own a 600k asset that nobody needs to pay you for using.
        brianwawok 5y ago
        What’s the IP worth of most failed startups? The code is a bunch of calls to other GPL libraries. The code has 0 value until people pay to use it.
        b20000 5y ago
        that assumes there is no value in integrating code. actually, from my experience, that is where the value is. how you put into practice components to solve a new problem or offer a new way to do something people are willing to pay for.
        duped 5y ago
        Not sure how much of a win that is for the taxpayers. You loaned someone hundreds of thousands for something that no one found value in, but at least it's open source? A better use of public money is funding industries with high capital requirements for straight equity. I'd rather we build fabs for Intel and AMD in the Great Lakes region with federal money in exchange for stock where the returns can go to pensions.
    - b20000 5y ago
      but the rates are not low. AND… in the case of SBA or govt programs from other countries the debt comes with restrictions which will hamper your ability to be succesful.
      - irjustin 5y ago
        > but the rates are not low What are you comparing to? If you've shopped around for interest rates you'll know a bank loan is the lowest of the generally accessible loans. More specifically mortgages are the easiest low rates because they're very predictable (compared to other assets).
  - daniel-cussen 5y ago
    Well so there's actually tons of wannabes with IP that isn't worth anything. Tons and tons and tons. How do you differentiate between them and the real deal? If you can differentiate, why are you still a retail banker?
daenz 5y ago
Is this required reading for startup founders? It's way over my head. I get some of the core concepts, but reading about this stuff makes me wonder why growing a startup can't more simple. I get that there are real world needs for things to be as complicated as they are, so that things can grow very quickly, with people aligned with incentives and committed to a common goal. But seriously, why does it feel like this level of complexity is the norm? And just one slip up and you've screwed all of your finances forever (among many other potential horrible outcomes).
- crate_barre 5y ago
  You ever try to buy a house? The loan you get means jackshit to the lender. Your loan is going to get bucketed and sold off into large funds. Those funds in the aggregate hold value. No one really cares if you, who you are, your house, etc, are a particularly good investment in the macro scale. I suspect it’s similar in VC funding. You are just a company that sorta fits a conventional loan. In the macro sense, just a few need to hit, but they could care less about your special little company. You are packaged to investors. I imagine a world where the government buys startup backed securities to prop up the tech sector, in which case you’ll see even more startups. Right now it’s any Joe Schmo with money that act like the Fed. That way everyone and their mother can grab a loan for a house and a company, it’s a macabre form of socialism, uniquely American - so long as you make the monthly payments. Truthfully If I was a lender I’d have all my startups go public within a year and start paying back the debt via cashing out their stock, because that’s way more predictable than hoping your company becomes profitable or useful.
- devmunchies 5y ago
  I think of it like any sufficiently complex board game or strategy game. You want to leverage current strategies and efforts into layers of compounding strategy. Example, when playing Age of Empires, Factorio, or even The Sims, early optimizations and efficiency get quicker growth and allow you to advance more quickly. E.g in The Sims, it would be how to optimize the time learning skills that get you promoted as quickly as possible and even timing when you sleep and eat. You don’t HAVE to make it difficult, but that’s how you “beat the game” quicker. If you have a business model that aligns itself well to some kind of financial multiplier, like generating lots of float, then you could hire a good CFO to handle the difficult thinking. If you can generate healthy floats (ie insurance companies, where I prepay months or years before I file a claim), then you don’t even need loans, you’re getting access to capital at 0% interest
devmunchies 5y ago
Speaking of debt, tangential question for my own learning. Maybe founders do this with their own stock… let’s say I have a stock portfolio with X amount, could I get a loan with my stock as collateral for a down payment on real estate? That way I don’t actually need to sell stock to afford a down payment? Would a bank shy away from that non-conventional loan assuming my portfolio is larger than a down payment and I make a good wage? Any googling collateralized stock shows me articles on making trades on loans from the stock broker, but not for using that money for something else.
- drewrv 5y ago
  There are companies that offer loans like this but the rates aren’t great. Also mortgage lenders don’t like it if your down payment is debt. I believe wealthy people (so some founders) do this on better terms because they have a better negotiating position.
  - devmunchies 5y ago
    > mortgage lenders don’t like it if your down payment is debt How would they know unless you told them?
- Panzer04 5y ago
  You can certainly margin your stock and buy something else with the withdrawn money, often at very low rates (eg. 1-2% at IBKR), but that runs the same risk of automatic liquidation as all margin does.
- crystoloxy 5y ago
  Yes, you can get a pledged asset line, a secured line of credit collateralized by your portfolio. A PAL is not for a particular purpose, so you can use it for pretty much whatever you want — other than buying securities. Random example: https://www.schwab.com/pledged-asset-line https://www.schwab.com/pledged-asset-line
  - devmunchies 5y ago
jimmySixDOF 5y ago
I wonder how this overview of debt options compares to results generated by DAO/ICO/NFT approaches for both pre-seed and later stage. It seems to me that common interest community finance pooling options are now on the table for serious consideration and I would like to see more comparison to these established practices. Entering into a single startup's narrowly focused business DAO with its own coin/token model appropriately tied to the same business earning metrics discussed in the article has the possibility of restructuring the whole compensation for value added chain. Consider a sweat-for-debt agreement where the developer completes a scope of work for repayment terms defined and backed by the DAO. Apply this at scale and you may have a new branch of venture capital/debt.

b20000 5y ago

i will warn anyone against taking on convertible debt or government backed debt while also investing your own time and money in a company. i have been through this experience and sooner or later the debt will mature. this could mean that you lose all the IP you developed and the money invested. tread carefully. i have also tried to raise debt against considerable IP assets (not patents but actual implementations and products) and was never able to do that. this remains a huge opportunity to this day. raising debt against real estate or other traditional assets is nothing new and no point in writing an article on that. i would personally never borrow against my home no matter how much i believe in my company as there is always the unexpected event that can f** up everything.

candiddevmike 5y ago
I've been in this exact same situation and it is a real struggle. Banks and the SBA are incredibly useless when it comes to loans for startups/small tech companies, especially the clueless loan approval folks. Supposedly there are a number of government grants meant to help tech companies secure financing without taking on insurmountable debt, but I have yet to find them.
- irjustin 5y ago
  > Banks and the SBA are incredibly useless when it comes to loans for startups/small tech companies I mean isn't that the point? Banks loan money for low risk which is why they're able to offer those low rates. Small usually means risky, not always, but definitely the default.
  - candiddevmike 5y ago
    Not necessarily, it's about collateral. Banks want real assets, not IP, which they value at 0. This isn't really the case though, it's just they don't know how to valuate it. Sure, it may be close to 0 in certain cases, but if someone with a collection of garage sale knick knacks can get a loan to open a flea market with their inventory as part of the collateral, why can't I with just IP?
    - duped 5y ago
      It's a lot harder to find someone to buy IP than baseball cards
      - candiddevmike 5y ago
        Here's an idea: government backed loans for tech companies, and if they fail, the government gets the IP and releases it under some kind of FOSS license. Seems like a win-win.
        b20000 5y ago
        what if the govt lends you 100k but you spent 500k of your savings and time? now they own a 600k asset that nobody needs to pay you for using.
        brianwawok 5y ago
        What’s the IP worth of most failed startups? The code is a bunch of calls to other GPL libraries. The code has 0 value until people pay to use it.
        b20000 5y ago
        that assumes there is no value in integrating code. actually, from my experience, that is where the value is. how you put into practice components to solve a new problem or offer a new way to do something people are willing to pay for.
        duped 5y ago
        Not sure how much of a win that is for the taxpayers. You loaned someone hundreds of thousands for something that no one found value in, but at least it's open source? A better use of public money is funding industries with high capital requirements for straight equity. I'd rather we build fabs for Intel and AMD in the Great Lakes region with federal money in exchange for stock where the returns can go to pensions.
  - b20000 5y ago
    but the rates are not low. AND… in the case of SBA or govt programs from other countries the debt comes with restrictions which will hamper your ability to be succesful.
    - irjustin 5y ago
      > but the rates are not low What are you comparing to? If you've shopped around for interest rates you'll know a bank loan is the lowest of the generally accessible loans. More specifically mortgages are the easiest low rates because they're very predictable (compared to other assets).
- daniel-cussen 5y ago
  Well so there's actually tons of wannabes with IP that isn't worth anything. Tons and tons and tons. How do you differentiate between them and the real deal? If you can differentiate, why are you still a retail banker?

daenz 5y ago

Is this required reading for startup founders? It's way over my head. I get some of the core concepts, but reading about this stuff makes me wonder why growing a startup can't more simple. I get that there are real world needs for things to be as complicated as they are, so that things can grow very quickly, with people aligned with incentives and committed to a common goal. But seriously, why does it feel like this level of complexity is the norm? And just one slip up and you've screwed all of your finances forever (among many other potential horrible outcomes).

crate_barre 5y ago
You ever try to buy a house? The loan you get means jackshit to the lender. Your loan is going to get bucketed and sold off into large funds. Those funds in the aggregate hold value. No one really cares if you, who you are, your house, etc, are a particularly good investment in the macro scale. I suspect it’s similar in VC funding. You are just a company that sorta fits a conventional loan. In the macro sense, just a few need to hit, but they could care less about your special little company. You are packaged to investors. I imagine a world where the government buys startup backed securities to prop up the tech sector, in which case you’ll see even more startups. Right now it’s any Joe Schmo with money that act like the Fed. That way everyone and their mother can grab a loan for a house and a company, it’s a macabre form of socialism, uniquely American - so long as you make the monthly payments. Truthfully If I was a lender I’d have all my startups go public within a year and start paying back the debt via cashing out their stock, because that’s way more predictable than hoping your company becomes profitable or useful.
devmunchies 5y ago
I think of it like any sufficiently complex board game or strategy game. You want to leverage current strategies and efforts into layers of compounding strategy. Example, when playing Age of Empires, Factorio, or even The Sims, early optimizations and efficiency get quicker growth and allow you to advance more quickly. E.g in The Sims, it would be how to optimize the time learning skills that get you promoted as quickly as possible and even timing when you sleep and eat. You don’t HAVE to make it difficult, but that’s how you “beat the game” quicker. If you have a business model that aligns itself well to some kind of financial multiplier, like generating lots of float, then you could hire a good CFO to handle the difficult thinking. If you can generate healthy floats (ie insurance companies, where I prepay months or years before I file a claim), then you don’t even need loans, you’re getting access to capital at 0% interest

devmunchies 5y ago

Speaking of debt, tangential question for my own learning. Maybe founders do this with their own stock… let’s say I have a stock portfolio with X amount, could I get a loan with my stock as collateral for a down payment on real estate? That way I don’t actually need to sell stock to afford a down payment? Would a bank shy away from that non-conventional loan assuming my portfolio is larger than a down payment and I make a good wage? Any googling collateralized stock shows me articles on making trades on loans from the stock broker, but not for using that money for something else.

drewrv 5y ago
There are companies that offer loans like this but the rates aren’t great. Also mortgage lenders don’t like it if your down payment is debt. I believe wealthy people (so some founders) do this on better terms because they have a better negotiating position.
- devmunchies 5y ago
  > mortgage lenders don’t like it if your down payment is debt How would they know unless you told them?
Panzer04 5y ago
You can certainly margin your stock and buy something else with the withdrawn money, often at very low rates (eg. 1-2% at IBKR), but that runs the same risk of automatic liquidation as all margin does.
crystoloxy 5y ago
Yes, you can get a pledged asset line, a secured line of credit collateralized by your portfolio. A PAL is not for a particular purpose, so you can use it for pretty much whatever you want — other than buying securities. Random example: https://www.schwab.com/pledged-asset-line https://www.schwab.com/pledged-asset-line
- devmunchies 5y ago

jimmySixDOF 5y ago

I wonder how this overview of debt options compares to results generated by DAO/ICO/NFT approaches for both pre-seed and later stage. It seems to me that common interest community finance pooling options are now on the table for serious consideration and I would like to see more comparison to these established practices. Entering into a single startup's narrowly focused business DAO with its own coin/token model appropriately tied to the same business earning metrics discussed in the article has the possibility of restructuring the whole compensation for value added chain. Consider a sweat-for-debt agreement where the developer completes a scope of work for repayment terms defined and backed by the DAO. Apply this at scale and you may have a new branch of venture capital/debt.