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Wouldn't this be a better deal than money in exchange for ownership? I mean, they get the money and still have control of the company.
by denis1 12y ago
Wouldn't this be a better deal than money in exchange for ownership? I mean, they get the money and still have control of the company.
- lukasm 12y agoCompanies take debt to optimise tax.
- edwinyzh 12y agoWell, I need to ask what does this mean, I appreciate it if anybody can explain in with an example :)
- mynegation 12y agoThe better wikipedia article would be http://en.wikipedia.org/wiki/Tax_shield http://en.wikipedia.org/wiki/Tax_shield Debt itself (as a liability) is definitely not deducted from profit, but repayment of debt is deducted from the profit, and - what is more important - interest on debt is deducted from the tax base as a result. Which means that if you can load up on debt to get higher return, than you would get investing your own money.
- denis1 12y ago@edwinyzh as I understand it, basically you deduct the debt from the profit and pay taxes only for the remaining amount. Wikipedia has a very short article on this [1]. [1]: https://en.wikipedia.org/wiki/Tax_benefits_of_debt https://en.wikipedia.org/wiki/Tax_benefits_of_debt
- icelancer 12y agoYes, but not all companies can raise $50mm on credit. Digital Ocean is already well-established. If you're a start-up, people aren't generally interested in investing X dollars at a small percentage return.
- InclinedPlane 12y agoYes, exactly. But getting a loan or a line of credit in the multi-million dollar range implies a certain level of trust in the viability of your company which typically is lacking in most early stage startups. The risk associated with venture capital transforms that relationship into not merely a financial transaction but more of a partnership, which is why equity is typically given.