> "Folks don't want to do down rounds or flat rounds," says Haim Zaltzman, a partner at law firm Latham & Watkins LLP, which has handled well over 100 such loan transactions so far this year. "Debt allows you to get around that."
Eh. I'm not too into the whole startup scene these days, and I haven't been exactly fishing for VC deals in today's market, but I believe that if your startup is only getting term sheets that provide you with a deal that forces you down or flat, you should seriously be considering looking at your business fundamentals before you are trying to raise funding by other means.
VC is speculative and looks for returns with dilution; if your company starts to go belly up, you can look at some acquihire or insta-acquisition through the VC's network so the VC firm can save face and see some ROI.
However, if you can't make your debt payments, banks don't care. They have no LPs to answer to, just their balance sheets. They will gladly step in with their attorneys and carve out any asset they can from your precious company. Caveat emptor. I have always been told by trusted GPs that debt is useful in very, very limited situations, and it seemed to me that the dreams of the entrepreneurs getting stuck with debt deals are already grasping at straws. I think there's a point at which you need to know when to quit.
"you should seriously be considering looking at your business fundamentals before you are trying to raise funding by other means."
+ They may not have a choice. A lot of things require working capital in one way or another.
"They will gladly step in with their attorneys and carve out any asset they can from your precious company." - thing is most startups have zero in the way of assets. So ... there's not a lot to collect upon. It's not like writing off a mortgage, wherein they can recoup 75% of the loan on foreclosure.
The whole premise of this article is upside-down ... why are startups with limited ability to collateralize even getting debt at any price?
I'll bet that this 'phenom' is happening for a variety of very specific reasons, and that 'debt' happens to be the common instrument, hence the basis for the article. If they broke it down into the various categories, we might get a better picture.
If your company starts to go belly up and you get acquihired, you'll probably walk away as empty handed as a bank default, due to liquidation preferences and other terms in VC funding.
Founders aren't always in it just for the bank account. Between going belly up and shuttering, and going belly up and giving their team a chance in another company, existing customers, etc., acquihire is preferable to getting carved up. At the very least, founders need to save face too.
Depends on the terms of the acquisition. From what I've read, they often favor founders and aren't great outcomes for investors. E.g., the windfall is often in the retention package to maximize for the acquirer who has the most leverage.
Eh. I'm not too into the whole startup scene these days, and I haven't been exactly fishing for VC deals in today's market, but I believe that if your startup is only getting term sheets that provide you with a deal that forces you down or flat, you should seriously be considering looking at your business fundamentals before you are trying to raise funding by other means.
VC is speculative and looks for returns with dilution; if your company starts to go belly up, you can look at some acquihire or insta-acquisition through the VC's network so the VC firm can save face and see some ROI.
However, if you can't make your debt payments, banks don't care. They have no LPs to answer to, just their balance sheets. They will gladly step in with their attorneys and carve out any asset they can from your precious company. Caveat emptor. I have always been told by trusted GPs that debt is useful in very, very limited situations, and it seemed to me that the dreams of the entrepreneurs getting stuck with debt deals are already grasping at straws. I think there's a point at which you need to know when to quit.