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Bridge Loans

avc.com

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Re: Bridge Loans

#61

Post by FreakLegion »

Animats wrote: post #26
asah wrote: post #19

The comments here seem to forget that financing is ESSENTIAL to startups - even profitable ones. As a reminder, 99% of the marketcap (value) of a startup is its growth, not its present size/revenue/etc. By mathematical definition, a startup cannot fund fast-enough growth on current profits and therefore requires financing and a lot of it. You finance a startup with a mix of VC and debt. As the business becomes less s…

"As a reminder, 99% of the marketcap (value) of a startup is its growth, not its present size/revenue/etc. By mathematical definition, a startup cannot fund fast-enough growth on current profits and therefore requires financing and a lot of it." Autodesk did. Initial investment was $60K by the founders, and the company was profitable early on.[1] No VCs were involved. There were discussions with some VCs, and they we…

Plenty of tech companies have done just fine skipping VC money, or delaying it until they had maximum leverage, like GitHub or Transmit.

Autodesk isn't really interesting here, though. They IPO'd almost 40 years ago at a tiny fraction of their current value, and that tiny fraction is the only number that matters. Anyone could've jumped on at the IPO and still realized 99% of that $47 billion. The investors missed out, but it wasn't some big whiff. The IPO was mediocre by today's standards.

Re: Bridge Loans

#62

Post by hn_throwaway_99 »

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…

This isn't the same things as standard liquidation preferences. Normally, liquidation preferences limit the downside for investors, but since investors hold equity they will participate in all of the upside.

For a bridge loan it's different. The 2x/3x is not a liquidation preference really, because since the loan doesn't convert to equity in a sale, that's the maximum the bridge loan creditor can receive in a sale.

Re: Bridge Loans

#63

Post by rileymat2 »

mason55 wrote: post #53
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?

> 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 ra…

This only matters if the cash is deployed in a ROI positive way, because that cash you are accounting for will soon become something else.

Re: Bridge Loans

#64

Post by toomuchtodo »

robocat wrote: post #51
krisoft wrote: post #42

Earlier quoted context omitted.

> 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-bus…

Excellent advice in this sub thread.

Re: Bridge Loans

#65

Post by icedchai »

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.

There was a major down round after the bridge loan, before the "acquisition" (fire sale.)

In the end, I got nothing back. Zero.

Re: Bridge Loans

#66

Post by icedchai »

Quarrel wrote: post #54
jiveturkey wrote: post #46

Earlier quoted context omitted.

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.

it went wrong with a CEO that didn't listen to anyone.

Re: Bridge Loans

#67

Post by Exness199507 »

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…

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