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Founders, be careful about personally guaranteeing leases

10 points by mgav ↗ HN
The co-founder in this story supposedly personally guaranteed her startup's lease. The startup failed and now she's being sued personally for $1.7 million.

https://therealdeal.com/2022/10/12/soho-landlord-sues-audrey-gelman-the-wing-for-1-7m-in-rent/

10 comments

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2rsf
That's relevant to everything in a business and why limited liabilities were invented. If you are guaranteeing something personally then you are the one the needs to pay them at the end
e1g
Sometimes you don’t have a choice to do the right/safe thing.

I signed multiple commercial leases in lower Manhattan, and had serious negotiations with ~10 landlords through our agent - the clause for personal/3rd party guarantee was non-negotiable for every single one.

This company had WeWork as a major investor, and I’m sure they had good advisors all around, but Manhattan real estate is a special beast.

badpun
Did you consider renting in a different part of NYC to get out of that personal liability?
e1g
No, so I can’t speak from experience for the rest of NYC.

However, I suspect expensive and sophisticated pockets all across NYC will also insist on the same Good Guy guarantee. It’s just too easy to register an LLC/C-corp, and if too many people use that hack to walk away from serious commitments, that will freeze the commercial lease market.

kjs3
I think the point was "why would you HQ your startup in one of the most expensive/sophisticated markets in the country in the first place?". There are some business plans where that might make sense, but for the majority the risk of incurring this level of liability shouldn't be worth it.
e1g
Yes, we all should choose the location based on what we are trying to optimize for. I run an enterprise SaaS, and I project that over the next ten years, being based in the global corporate hub will create optionality that's worth more than the increase in my running costs. So I moved internationally to live & build in NYC.

Once I crystalized what I wanted to optimize for (the "why" and the "what"), many other big decisions downgraded into low-uncertainty execution issues of "how".

However, this calculation is personal and will differ for every startup/founder. I'd even say that unless you are sure that NYC/Manhattan is the right place for you right now, it almost certainly isn't. Living & building here requires conviction and must be re-evaluated every few years.

TimSchumann
This just speaks to how absolutely terrible the NYC commercial real estate market is.
bruce511
You always have a _choice_. Your alternative is not to sign.

Of course you want the benefits of the lease - your company needs space, or whatever. So your choice becomes "sign, or don't get the lease."

Which brings us to risk. The landlord understands your business is in a risky phase. They can't control that, so they'd prefer that you, personally, since you have control, take that risk.

There are two approaches you can take here -

a) own nothing. If you own nothing then you can take on all the risk you like since debtors prison is no longer a thing. Of course then you need someone to own your assets, which leads to a different kind of risk.

Or b) negotiate hard. 20 years ago we managed to get a lease without personal surety by paying a much larger deposit. We basically payed to move the risk back to the landlord. (it turned out well for him, we're still there, and we've been his best, and longest, tenent in the building.)

C) walk away. Find another way to get what you need. Or

D) agree to take on the risk personally. Bet all your worldly possessions - go all in. Not the approach I recommend, but seems like many folk are happy with this approach.

e1g
Nobody here is betting all their worldly possessions.

In my case, I run a profitable enterprise SaaS business with enough cash balance (from retained earnings) to pay the entire lease term upfront without a significant impact. I demonstrated this to every landlord, and none changed their requirements. The market norms are what they are.

In the case of the article, the founder raised $100M, was on the cover of the Inc magazine, lives in a $3-4m house, and her husband sold another startup for $80M, etc. They hardly lose sleep over a $1.7M lawsuit in real estate. In NYC, that's just another minor claims dispute.

bruce511
Fair enough, when I say "all your worldly possessions" I'm assuming you have less than the outstanding value of the lease (or loan, or whatever you are signing surety for.)

I was speaking from the perspective of someone who considers $1.7m to be more than just pocket-change.

>> In my case, I run a profitable enterprise SaaS business with enough cash balance (from retained earnings) to pay the entire lease term upfront without a significant impact. I demonstrated this to every landlord, and none changed their requirements.

Then clearly one option you have is to pay the lease upfront, and presumably if you did that you don't need to sign a personal surety since then there's nothing to sign for.

Of course the landlord doesn't really care what your cash status is _now_ - they care what your business cash status may be 4 years from now. The risk to them is not at the moment they take on the lease, it's in all the moments from now to the end of the lease. And risk can change dramatically over that period.

If I was a landlord, and you came to me showing that you had the entire lease in cash lying around, and you didn't want to sign surety, then I'm sure we could do a deal for a single up-front payment - probably with very generous terms to you to allow for the future value of money.