Keeping Your Equity: Is Borrowing Money a Better Option?

Debt can be less dilutive than equity. Interested?

Why you might need to borrow money:

• Corporate credit cards.
• Equipment purchases.
• Working Capital.
• Growth Capital – add runway before your next equity round at higher valuation.

Getting started – outreach

Find a banker in this space and get to know how they work. Build the relationship early; start by opening an account at the right bank. The guy behind the counter at your local branch bank probably isn’t the right person to talk to. Your lawyer should know  bankers eager to pitch for your business.

Be realistic: You may need revenue to repay a loan. You almost certainly will need institutional investors. Show the lender why you’ll be a valued client.

1. Be careful – the wrong lender can hurt you.

• You want a lender who’s worked with companies through good times and bad.
• Cheap money isn’t always the best. Do you compete on price alone?
• The lender will have a very big club – a lien on all the company’s assets that permits the lender to sell your company to get repaid if there’s a problem.

2. Vet the deal terms:

• Know how much you want. In a frothy market, it’s easy to get greedy and borrow too much. You’ll have to repay loans, first interest and then principal.
• How long will you have the money? Repayment schedule eats into your capital.
• What will it cost? It’s not just the interest rate. Watch for up front and back-end fees, prepayment penalties.
• What’s the dilution? Lender will want warrants to buy your stock, up to 2% of your company and more.
• What are the reporting requirements? Your lender will want monthly financial statements and more (maybe even board packages!)
• Don’t be hamstrung.   Understand the financial and other promises (“covenants”) that can tie you down.
• Which of your assets secures the loan? Does that include intellectual property, or does the lender only want to make you promise not to sell your IP or use it to secure any other obligations?

3. What can your attorney do for you?

• Make introductions. Your attorney should have deep connections in this market.
• Help structure and sign a deal that makes sense. There’s a lot of junk in these docs, and a few things that matter. A lawyer in the market should know what matters and what doesn’t.