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So if the company has a startup capital of $1000 (certain not enough to run the company), the founder would have to continue to loan the company to keep it aliv

by dear 14y ago

So if the company has a startup capital of $1000 (certain not enough to run the company), the founder would have to continue to loan the company to keep it alive. Someoneday in the future when the company makes enough revenue it will start paying back the loan. Is that the idea?

brudgers 14y ago
There are all sorts of situations. As noted a loan is an alternative to a partial buyout. Supposing that in your scenario, one founder puts in $10,000 and gets 10% of the other founder's stock. Assuming two founders and a fifty-fifty split, that means the company is now valued at $100,000 and the selling founder (that's the one without cash) has realized capital gains of $4950 upon which he will owe taxes. He may also be pissed off because the real equity, his sweat doesn't fall into the equation. Maybe 45-55 isn't so bad. But each time this happens, the broke founder has less potential upside. And he's been forced to sell. And to sell cheap. As his equity is reduced, his incentive to walk away is greater. In other words, reducing his equity reduces the alignment between his interests and that of the other founder. Conversely, if the loan is unlikely to be repaid, then the additional equity probably isn't worth anything anyway. An advantage of a loan over partial buyout becomes more apparent if the company is liquidated - let's suppose for $4000. In the partial buyout, the 55% stakeholder would receive $2200 and the other stakeholder $1800. In the loan scenario, the lending party would recover $4000 and the other founder nothing.
- meric 14y ago
  What about: Founder A has $10,000 to invest. Founder A lends $5,000 to Founder B (at some agreed interest rate) and both founders invest $5,000 each, both gaining equal number of shares. Founder B owes Founder A even when the company goes broke. Would this make it fairer in all situations?
  - brudgers 14y ago
    The people involved determine what is fair not me. However, I can see some factors to consider in regards to the personal loan. First it prioritizes cash over effort. This expresses a lack of faith in the startup. Second nothing poisons personal relationships like debt. Third it means that B has an incentive to quit and get a regular job earlier in the company's life cycle because he has an additional bill to pay. Arm's length marriage is not a good idea. I think the personal loan makes a hash of things. Suppose founder B writes the critical piece of code? Should he require founder A to pay for it? Suppose he makes the critical sale, should he get more equity? Founders bring different resources to the enterprise. If one founder is unable to contribute a critical resource, the sensible options are to find a working source or forgo the enterprise. If you must have your money back, don't invest in a startup.

by dear 14y ago

brudgers 14y ago

There are all sorts of situations. As noted a loan is an alternative to a partial buyout. Supposing that in your scenario, one founder puts in $10,000 and gets 10% of the other founder's stock. Assuming two founders and a fifty-fifty split, that means the company is now valued at $100,000 and the selling founder (that's the one without cash) has realized capital gains of $4950 upon which he will owe taxes. He may also be pissed off because the real equity, his sweat doesn't fall into the equation. Maybe 45-55 isn't so bad. But each time this happens, the broke founder has less potential upside. And he's been forced to sell. And to sell cheap. As his equity is reduced, his incentive to walk away is greater. In other words, reducing his equity reduces the alignment between his interests and that of the other founder. Conversely, if the loan is unlikely to be repaid, then the additional equity probably isn't worth anything anyway. An advantage of a loan over partial buyout becomes more apparent if the company is liquidated - let's suppose for $4000. In the partial buyout, the 55% stakeholder would receive $2200 and the other stakeholder $1800. In the loan scenario, the lending party would recover $4000 and the other founder nothing.

meric 14y ago
What about: Founder A has $10,000 to invest. Founder A lends $5,000 to Founder B (at some agreed interest rate) and both founders invest $5,000 each, both gaining equal number of shares. Founder B owes Founder A even when the company goes broke. Would this make it fairer in all situations?
- brudgers 14y ago
  The people involved determine what is fair not me. However, I can see some factors to consider in regards to the personal loan. First it prioritizes cash over effort. This expresses a lack of faith in the startup. Second nothing poisons personal relationships like debt. Third it means that B has an incentive to quit and get a regular job earlier in the company's life cycle because he has an additional bill to pay. Arm's length marriage is not a good idea. I think the personal loan makes a hash of things. Suppose founder B writes the critical piece of code? Should he require founder A to pay for it? Suppose he makes the critical sale, should he get more equity? Founders bring different resources to the enterprise. If one founder is unable to contribute a critical resource, the sensible options are to find a working source or forgo the enterprise. If you must have your money back, don't invest in a startup.