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.
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.
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?
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.
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.
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.
i doubt that components for consumer electronics can be made cheap enough manufacturing them in the US. you just never are going to be able to make a TV for $150 in the US. it’s a pipe dream made up by politicians.
and why the great lakes? pollute the beautiful nature in minnesota and surroundings?
also, VCs just follow trends and don’t understand many industries. no VC or angel funding does not mean anything.
Cheap power and plentiful freshwater supply that can be utilized renewably (fabs don't capture water like say, agriculture).
There are multiple fabs in the US today making components for consumer electronics as well as multiple fabs under construction. Government incentives are a major factor in choosing sites for these projects, we know we need more of them domestically, and know we can make a buck off them for the taxpayer.
Because it is uncertain if the IP will bring in any money -- because it has not done so in the past so far, has it?. If you can show you're already getting some revenue out of the IP then I think you will have a good chance with the banks. They like existing businesses with existing cash-flow.
Garage sales typically bring in some value or at least the value of the goods is relatively easy to evaluate. Not so with IP.
The way would be to show you have a company willing to purchase the IP at a certain amount, and borrow against that - but if you have that just get that company to invest.
The dirty secret the banks know and the startups don’t want to admit is that much IP is worthless.
ever heard of “not invented here”? even if you have valuable IP big tech companies think they can do better even if they cannot, or are simply greedy and will spend a multiple of what your IP costs just so they don’t need to acquire you. that is what i’ve noticed. there is little logic or reason.
Keep in mind that "big companies" consist of many "small people".
If you offer them the IP for sale any decision-maker in the company that could approve paying for it will need to ask themselves: "How much would this help my career in this company personally? Or does it put me in risk of possible failure? Does it put me in competition with our other departments? How much would we need to invest our own time and efforts to integrate this IP into our product-line?".
it is uncertain that the garage sale crap will bring in any money. or your inventory. besides, they discount it 90% anyway.
people do buy and sell small businesses. why is a pizza place worth any money? because of the customer database? but that is IP too, so why does that have value? why do i need to pay 50K for that but the code i spent writing for 15 years has “no value”? even if a FAANG is doing something similar right now but their code sucks?
i have had actual products in the market incorporating IP and the banks still think it is worth zero.
Film financing is ... complex, to say the least, but the classic debt financing model is backed by presale agreements, where you shop a package (script, director, actors, etc.) to distributors, who agree to buy territorial rights (which may include derivative rights to the IP, such as toys or novelizations); those contracts are then used as discountable collateral for the actual financing. (There are approximately 1,795 other ways film is financed, many requiring a comprehensive understanding of multiple national tax codes, but that's the way it used to be done.)
ok, so a distributor thinks a movie will make $100MM, they buy the rights for $50MM, and the bank discounts this to $10MM, so they get a loan for $10MM?
Approximately, yep! For a variety of reasons this approach doesn't hold the pride of place it used to in the indie space; instead you see filmmakers taking on alternate funding, including equity, and then selling distribution at market (the idea here being that a good film with strong reviews will command higher prices after screening, particularly if streamers are interested).
For smaller filmmakers, debt instruments are generally relegated to gap financing: high-risk and expensive loans that cover relatively small percentages (10-20%) of the total budget, and are backed less by secured contracts and more by the track record of the team package (including sales agent) -- basically, think mezzanine financing.
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.
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).
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?
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).
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.
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
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.
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.
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.
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.
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[ 3.6 ms ] story [ 83.9 ms ] threadi 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.
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.
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.
and why the great lakes? pollute the beautiful nature in minnesota and surroundings?
also, VCs just follow trends and don’t understand many industries. no VC or angel funding does not mean anything.
There are multiple fabs in the US today making components for consumer electronics as well as multiple fabs under construction. Government incentives are a major factor in choosing sites for these projects, we know we need more of them domestically, and know we can make a buck off them for the taxpayer.
Garage sales typically bring in some value or at least the value of the goods is relatively easy to evaluate. Not so with IP.
The dirty secret the banks know and the startups don’t want to admit is that much IP is worthless.
If you offer them the IP for sale any decision-maker in the company that could approve paying for it will need to ask themselves: "How much would this help my career in this company personally? Or does it put me in risk of possible failure? Does it put me in competition with our other departments? How much would we need to invest our own time and efforts to integrate this IP into our product-line?".
people do buy and sell small businesses. why is a pizza place worth any money? because of the customer database? but that is IP too, so why does that have value? why do i need to pay 50K for that but the code i spent writing for 15 years has “no value”? even if a FAANG is doing something similar right now but their code sucks?
i have had actual products in the market incorporating IP and the banks still think it is worth zero.
For smaller filmmakers, debt instruments are generally relegated to gap financing: high-risk and expensive loans that cover relatively small percentages (10-20%) of the total budget, and are backed less by secured contracts and more by the track record of the team package (including sales agent) -- basically, think mezzanine financing.
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).
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).
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.
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
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.
I believe wealthy people (so some founders) do this on better terms because they have a better negotiating position.
How would they know unless you told them?
Random example: https://www.schwab.com/pledged-asset-line
What I expected, need to already have assets within Schwab
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.