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Bridge Loans

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Re: Bridge Loans

#51

Post by robocat »

krisoft wrote: post #42
robocat wrote: post #39

Earlier quoted context omitted.

> By mathematical definition, a startup cannot fund fast-enough growth on current profits and therefore requires financing and a lot of it. Untrue. Sell enough annual SaaS plans and you get cash before your future costs - perhaps enough to self-fund growth depending on specifics for your SaaS. Skip to 14 minutes in of https://m.youtube.com/watch?v=otbnC2zE2rw for explanation. Jason’s explaination for his own business…

> Sell enough annual SaaS plans and you get cash before your future costs That might be true if you only need to pay for the operational costs, but someone has to develop that service first, don’t they? How do you sell annual SaaS plans without spending a huge chunk on development first?

You are asking about what I would call founding/inception costs. I was replying to an absolutely wrong comment that was about scaling/growth/marketing costs.

From my own experience, I helped cofound a now-successful small business that we retain 100% ownership of. Founders used the “sweat equity” of our own time (even with kids and mortgages), and one person did some consultancy work, and we had one initial large-business customer (although nowhere enough to pay our usual wages, it helped a little).

There is a lot of “bootstrapping-pr0n” videos and websites with a variety of techniques to build a business without extreme inception costs (e.g. techniques to avoid requiring paid staff when starting - staffing being the main cost for most software startups). The fabulously good video I linked alludes to some of that, and you can find other videos from those conferences.

If you do want to get initial funding, I think that ycombinator is an astonishingly valuable deal. Even applying should get you back more value than the time it costs you: https://www.ycombinator.com/apply/

Edit: I strongly recommend you avoid the “go big or not at all” culture/mentality: most founders fail and the median payoff for founders is quite negative. Venture capital and startup-pr0n encourages you to aim for billions: VCs can spread their bets; VCs have asymmetric information and payoffs; VCs only invest in less than 1% of the potential businesses they see; VCs get paid a base rate by their limited partners; VCs get preferential shares. For an individual it is more like a lottery because an individual’s risk profile is absolutely different from a VCs.

Re: Bridge Loans

#52

Post by browningstreet »

alberth wrote: post #50
jiveturkey wrote: post #44

Earlier quoted context omitted.

dilution is good for you

How is being diluted good for an investor? If a VC went from owning 20% of a company to now own 10% - how is that good for the VC?

No VC wants to be the only investor -- more investors, more validation, greater valuations, bigger upside.

Re: Bridge Loans

#53

Post by mason55 »

alberth wrote: post #50
jiveturkey wrote: post #44

Earlier quoted context omitted.

dilution is good for you

How is being diluted good for an investor? If a VC went from owning 20% of a company to now own 10% - how is that good for the VC?

> If a VC went from owning 20% of a company to now own 10% - how is that good for the VC?

Because that's not all that happens. The company also has a bunch more cash which means it's worth more.

You own less of a bigger pie but the actual value of your slice shouldn't change.

If you have 10 out of 100 shares of a company and it has a $10m pre-money valuation, your share of the company is worth $1m.

Now the company raises $2m. The new investors get somewhere between 16 and 20 (newly issued, dilutive shares). Now you have 10 out of 116 - 120 shares. 8.3% - 8.5% of a company worth $12m ($10m + the $2m in cash). Which puts the value of your shares right around your original $1m.

Except now the company has all this cash as well, so you're probably better off.

Re: Bridge Loans

#54

Post by Quarrel »

jiveturkey wrote: post #46
icedchai wrote: post #34

The last bridge loan I'm personally familiar with was a bridge to a fire sale about a year later. The company was sole for pennies on the dollar, screwing all the original preferred investors (myself include.)

as a preferred investor, how does this “screw” you? even in a situation where the debt is senior, in the VC game it’s generally better to shoot for the moon than to cut your losses. this is simply how the game is played.

Yep and unbridged the business presumably would have collapsed before the fire sale.

It doesn't sound like the fire sale was where it went wrong.

Re: Bridge Loans

#55

Post by Quarrel »

yieldcrv wrote: post #20

Protip: You don't need to be a VC to offer onerous debt financing. I know individuals that have made a killing offering loans to distressed publicly traded companies. They typically convert to MASSIVELY larger amounts of equity and dump that. Resulting in a death spiral for the company (unless the company's laughable prospects actually panned out), or result in a lien on assets that are also far greater in value than…

Dodgy stock brokers the world over make lots of money doing exactly this.

Re: Bridge Loans

#56

Post by rdli »

keithwhor wrote: post #29

Yikes. I feel like this is a smart way to bury the lede; > A very important consideration in structuring a bridge loan is what happens if the company is sold when the note is outstanding. […] I like somewhere between 2x and 3x depending on the circumstances. Slippery slope; Fred just gave ammunition to a whole bunch of firms to start negotiating liquidation preferences on term sheets, for which the “standard” has bee…

On a typical convertible note, I’d expect it to convert to equity on the same liquidation preference as the next round, and I do think even in this (bear) market I still think fully convertible deals are the norm.

Re: Bridge Loans

#57

Post by rdli »

fairity wrote: post #37
keithwhor wrote: post #29

Yikes. I feel like this is a smart way to bury the lede; > A very important consideration in structuring a bridge loan is what happens if the company is sold when the note is outstanding. […] I like somewhere between 2x and 3x depending on the circumstances. Slippery slope; Fred just gave ammunition to a whole bunch of firms to start negotiating liquidation preferences on term sheets, for which the “standard” has bee…

The standard is 1x for regular financings, but bridge rounds tend to be more distressed, so I wouldn’t be surprised if market is more like 2x.

I think the standard is fully convertible (i.e., you get your liquidation preference OR you convert) — a 1x as I think about it is you get your liquidation preference before you convert (i.e., two bites of the apple). Is that what you mean?

Re: Bridge Loans

#58

Post by jacquesm »

sbierwagen wrote: post #36
sixhobbits wrote: post #30

> New investors strengthen the investor syndicate which makes the company more resilient. New investors bring new ideas, new experiences, and new sources of funding to the business. uh, citation needed? Investors aren't meant to be there to bring 'ideas and experiences', and adding new ones to a company that isn't doing well feels like it would just add more tension and disagreement when what is probably needed is a…

Fred is a VC. VCs don't want to be just a dumb pipe of money, competing on terms, they want to be management coaches and compete on unmeasurable intangibles-- in exchange for more of the company at a lower price.

> VCs don't want to be just a dumb pipe of money, competing on terms

What they want and what they are is not necessarily the same.

Plenty of VCs are just dumb pipes for money. There are exceptions.

Re: Bridge Loans

#59

Post by jacquesm »

browningstreet wrote: post #52
alberth wrote: post #50

Earlier quoted context omitted.

How is being diluted good for an investor? If a VC went from owning 20% of a company to now own 10% - how is that good for the VC?

No VC wants to be the only investor -- more investors, more validation, greater valuations, bigger upside.

And not unimportantly: more people whose problem it is if things go South and then one of those might provide a solution acceptable to the remainder or there may be more people to spread the blame. Win win...

Re: Bridge Loans

#60

Post by yieldcrv »

gumby wrote: post #35
yieldcrv wrote: post #20

Protip: You don't need to be a VC to offer onerous debt financing. I know individuals that have made a killing offering loans to distressed publicly traded companies. They typically convert to MASSIVELY larger amounts of equity and dump that. Resulting in a death spiral for the company (unless the company's laughable prospects actually panned out), or result in a lien on assets that are also far greater in value than…

This is te standard PE playbook.

Yep but you can do a lot with just $100k at a time at overlooked smaller companies!

Despite there being a bunch of silicon valley companies afraid to go public, there are still hundreds and thousands of pink sheets and bulletin board stocks publicly traded just waiting for a boutique financier, and thats just in the US. UK has the AIM market, and other economies have stuff too.

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